AUD/USD slips as resilient US data dim hopes for early Fed cuts
- AUD/USD trades lower as firm US data and cautious Fed rhetoric support the Dollar.
- Markets push back near-term Fed cut expectations.
- Focus shifts to China's GDP, the PBoC decision and key US releases next week.
The Australian Dollar (AUD) trades on the back foot against the US Dollar (USD) on Friday, as resilient US economic data and hawkish-leaning Federal Reserve (Fed) rhetoric keep the Greenback firmly supported. At the time of writing, AUD/USD trades around 0.6684, down about 0.20% on the day and poised to end the week with marginal losses.
The pair is struggling to attract buying interest after a run of upbeat US releases reinforced expectations that the Fed is likely to stick to a cautious, gradual easing path, diminishing hopes for near-term rate cuts.
Data released this week showed that US labour-market conditions remain firm. Weekly Initial Jobless Claims fell to 198,000, beating expectations of 215,000, while regional manufacturing surveys also improved, with both the Empire State and Philadelphia Fed indices returning to positive territory.
Inflation data earlier in the week delivered a mixed but still relatively firm signal. Headline Consumer Price Index (CPI) rose 0.3% MoM in December, matching expectations and keeping the annual rate steady at 2.7%. While core CPI increased 0.2% MoM, coming in below the 0.3% forecast. On a yearly basis, core inflation eased to 2.6%, undershooting expectations of 2.7%.
Markets are fully pricing in no change at the upcoming January meeting and broadly expect the Fed to remain on hold through the first quarter. According to the CME FedWatch Tool, June is currently seen as the most likely timing for the first rate cut this year, with probabilities around 46%.
In contrast, the Reserve Bank of Australia (RBA) is widely seen as done with its easing cycle, as inflation is still running above target. Expectations are building that the central bank will keep rates on hold throughout much of the year, with some market participants even seeing the next move more likely to be a rate hike.
Looking ahead, traders will turn their attention to a busy economic calendar next week. In Australia, the TD-MI Inflation Gauge and employment data will be in focus. At the same time, China’s Q4 GDP, December activity data, and the People’s Bank of China’s interest-rate decision are due, which could be key drivers for the Aussie given Australia’s close trade ties with China.
In the United States, traders will also be watching the Gross Domestic Product (GDP) (annualized) release and the Personal Consumption Expenditures (PCE) inflation report for fresh clues on the monetary policy outlook.
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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