AUD/USD retreats from 0.6560 YTD highs ahead of the US PCE Inflation release
- The Aussie Dollar remains 1.7% higher on the week following a sharp rally over the previous four days.
- Investors are cutting US Dollar shorts ahead of the release of May's PCE Prices Index data.
- An improved appetite for risk and increasing expectations of Fed cuts have been driving the US Dillar lower this week.
The Aussie Dollar hit a fresh seven-month high at 0.6660 earlier on Friday but has failed to consolidate at those levels and is pulling lower at the time of writing, with investors paring back US Dollar shorts ahead of the release of the US PCE Prices Index report.
The pair remains on track for a 1.8% weekly rally after having appreciated steadily in the previous four days. The risk relief following the ceasefire in the Middle East has boosted demand for the Aussie while the weak US economic data and a rift between US President Trump and the Fed Chair Jerome Powell have hammered the US Dollar.
Investors are growing cautious about holding large USD shorts ahead of the US PCE Price Index release. The market anticipates a moderate increase on inflation, with no signs of any significant impact from Trump’s tariffs as of yet, which might pave the path for a rate cut in September or October.
In Australia, May’s Consumer Price data revealed cooler price pressures. The yearly CPI slowed down to a 2.1% pace from 2.4% in the previous month, well beyond the 2.3% reading forecasted by market analysts.
These figures increase expectations that the RBA might continue lowering interest rates in the coming months, but the impact on the Aussie was minimal, as US Dollar weakness has been the main market driver this week.
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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