AUD/JPY holds gains near 97.00 despite increased safe-haven demand
- AUD/JPY maintains its position as traders expect the RBA to maintain the current interest rates in August.
- The upside of the AUD/JPY cross may be capped amid subdued market sentiment stemming from renewed tariff concerns.
- Japan’s Liberal Democratic Party and Komeito could struggle to secure enough seats to retain their majority in upper house election.
AUD/JPY extends its winning streak for the third successive session, trading around 96.80 during the European hours on Monday. The currency cross appreciates as the Australian Dollar (AUD) gains ground amid rising odds of the Reserve Bank of Australia (RBA) maintaining the interest rates in August to get inflation on track to sustainably return to the 2-1/2% target.
RBA Governor Michele Bullock stated that inflation risks persist, citing the elevated unit labor costs and weak productivity as factors that could drive inflation above current projections. Meanwhile, RBA Deputy Governor Andrew Hauser highlighted growing global economic uncertainty and warned that the impact of tariffs on the world economy could be significant.
However, the upside of AUD/JPY cross could be limited as the AUD may struggle due to dampened market sentiment, driven by the new tariff concerns. Furthermore, increased safe-haven demand would support the Japanese Yen (JPY) and cap the upside of the currency cross.
US President Donald Trump announced, on Saturday, a 30% tariff on imports from the European Union (EU) and Mexico starting August 1. Trump also proposed a blanket tariff rate of 15%-20% on other trading partners, an increase from the current 10% baseline rate. Reports also indicated that the EU has initiated discussions with other countries hit by the tariffs, including Canada and Japan, to explore coordinated responses.
The JPY struggles amid rising fiscal concerns. Market speculation are growing that policymakers may pursue expanded fiscal spending to support the economy, including a potential cut to the consumption tax.
Meanwhile, recent media polls raised doubts about whether Japan's ruling coalition of the Liberal Democratic Party (LDP) and Komeito will be able to secure enough seats to maintain their majority at the upper house election on July 20.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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