AUD/USD declines for the third straight day, with focus on Fed Minutes
- AUD/USD experiences its third consecutive day of losses.
- Australian inflation remains steady in April, while hawkish Fed comments support the Greenback
- Monetary policy divergence and rate expectations set the stage for the pair’s potential next move.
The Australian Dollar (AUD) is facing a notable decline against the US Dollar (USD) on Wednesday as markets process the latest inflation data from Australia and anticipate the Federal Reserve's (Fed) forthcoming decisions. At the time of writing, AUD/USD trades at 0.6421, down 0.33% in the day.
With policy divergence becoming more pronounced, the AUD/USD pair is poised to record its third consecutive day of losses.
AUD/USD remains tied to monetary policy, interest rates, and inflation
In the United States (US), focus shifts to the release of the Federal Open Market Committee (FOMC) Meeting Minutes from the May rate decision, which may offer greater clarity on the Fed’s policy outlook amid persistent inflation and the Trump administration’s trade policies.
Looking ahead, any unexpected developments from the FOMC Minutes are likely to impact market expectations.
If rate predictions stabilize and market participants anticipate a rate cut in September, attention will shift to the upcoming economic reports from the US.
These will include the second preliminary reading of the Gross Domestic Product (GDP) for the first quarter, as well as the US Personal Consumption Expenditure (PCE) data and Michigan Sentiment index, both set to be released on Friday.
Australian CPI data overshadowed by hawkish Fed
On Wednesday, the Australian Bureau of Statistics released the April Monthly Consumer Price Index (CPI) figures. The monthly CPI remained steady at 2.4% in the year to April, the same figure as in March and above the forecast of 2.3%. Those figures remain in the Reserve Bank of Australia’s (RBA) target range of 2-3%, and markets still price another rate cut at the next meeting in July. Following the reduction of Australia’s Cash Rate to 3.85% during the May 20 meeting, the Federal Funds Rate in the US remains in the range of 4.25% to 4.50%, which has supported higher yields in the US.
The Fed has maintained a hawkish stance, emphasizing its commitment to being 'data-dependent,' which has limited any significant losses for the USD.
Moreover, trade dynamics between the European Union (EU) and the United States appear to be improving, fostering optimism regarding a potential trade agreement between the two economic powers.
Conversely, for Australia, which relies heavily on trade with China, indicators of economic weakness in China have direct ramifications for the AUD.
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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