Australian Dollar edges lower to near 0.6900 on Fed hike bets
- AUD/USD softens to near 0.6900 in Friday’s early Asian session.
- The US headline PCE price index climbed 4.1% YoY in May; core PCE advanced 3.4% YoY.
- Australia's Unemployment Rate fell to 4.4% in May, fueled by a sharp rebound in hiring.
The AUD/USD pair edges lower to around 0.6900 during the Asian trading hours on Friday. The US Dollar (USD) strengthens against the Australian Dollar (AUD) on the expectation of US rate hikes later this year. The release of the Michigan Consumer Sentiment Index report will be the highlight later on Friday.
US inflation increased further in May, with the headline Personal Consumption Expenditures (PCE) Price Index climbing 4.1% YoY, compared to 3.3% in April, the US Bureau of Economic Analysis (BEA) showed on Thursday. This report keeps the interest rate increase from the Federal Reserve (Fed) this year on the table.
Meanwhile, the core PCE, the Fed’s primary price gauge, rose 3.4% YoY in May, versus 3.3% prior. The annual core PCE reading was the highest since October 2023.
"PCE price inflation remains too high and will keep the Fed on hold and mulling a potential rate hike at upcoming meetings," said Scott Anderson, chief U.S. economist at BMO Capital Markets. "Services inflation ... will not be easily tamed by falling energy prices. The fight between the hawks and the doves is sure to remain intense,” he added.
On the other hand, the latest Australian employment data might help limit the Aussie’s losses. The country’s Unemployment Rate fell to 4.4% in May from 4.5% in April, according to the Australian Bureau of Statistics (ABS) on Thursday. The figure came in line with the market consensus.
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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