AUD/USD weakens below 0.6600 on Fed Powell's cautious rate outlook
- AUD/USD softens to around 0.6585 in Thursday’s early Asian session.
- Fed’s Powell highlighted the balance between jobs and inflation.
- Traders reduce their bets on an RBA rate cut after hotter Australia CPI inflation data.
The AUD/USD pair loses ground to near 0.6585 during the early Asian session on Thursday. The cautious rate outlook of the US Federal Reserve (Fed) Chair Jerome Powell provides some support to the US Dollar (USD) against the Australian Dollar (AUD). The final reading of the US Gross Domestic Product (GDP) for the second quarter (Q2) will be released later on Thursday.
Fed’s Powell struck a cautious tone on further easing on Tuesday, saying that the US central bank needs to continue balancing the competing risks of high inflation and a weak job market in coming policy decisions. His remarks lift the Greenback and create a headwind for the pair. Powell further stated that the interest rates are in a good place to deal with either threat, suggesting he sees no urgency to lower rates aggressively.
On Wednesday, San Francisco Fed President Mary Daly said that further rate reductions likely will be needed, as the central bank works to restore price stability and provide needed support to the labor market. Meanwhile, Chicago Fed President Austan Goolsbee warned against a series of rate cuts. Traders slightly pared back bets for a Fed rate cut by year-end to about 33%, according to LSEG data. Markets continue to expect no change to policy in the October meeting.
On the other hand, Australia’s monthly Consumer Price Index (CPI) inflation rose at the fastest annual pace in a year in August, suggesting some upside to inflation that prompted traders to pare back the bets of imminent policy easing. According to Reuters, prospects for a rate reduction at its November meeting faded to 50% from almost 70% before the data. This, in turn, could underpin the Aussie against the USD in the near term.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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