AUD/USD holds below 0.6500 despite Powell’s dovish tone
- AUD/USD softens to around 0.6485 in Monday’s early Asian session.
- Fed Chair Powell hinted at a possible September rate cut.
- RBA Meeting Minutes will be published later on Tuesday.
The AUD/USD pair loses ground to near 0.6485 during the early Asian session on Monday. The potential downside for the Australian Dollar (AUD) might be limited amid the prospect of a Federal Reserve (Fed) September rate cut following comments from Fed Chair Jerome Powell at the Jackson Hole symposium.
The Fed’s Powell on Friday signaled a possible interest rate cut at the US central bank's meeting in September, saying that risks to the job market were rising but also noting inflation remained a threat and that a decision wasn't set in stone. Powell further stated that the US central bank still believes it may not need to tighten policy solely based on uncertain estimates that employment may be beyond its maximum sustainable level.
According to the CME FedWatch tool, traders are now pricing in nearly an 85% odds of a 25 basis points (bps) rate cut in September, up from 75% before the speech.
The Reserve Bank of Australia (RBA) decided to cut the interest rate by 25 bps at the August policy meeting last week, bringing its Official Cash Rate (OCR) to 3.60% from 3.85%. Traders anticipate the Australian central bank to remain cautious after the rate decision. Traders expect the RBA may resume easing with a larger 50 bps rate cut, likely in November. RBA Meeting Minutes will be released later on Tuesday.
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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