Australian Dollar holds ground ahead of RBA policy decision
- AUD/USD gains as a resilient Australian Dollar draws support ahead of the Reserve Bank of Australia's upcoming interest rate decision.
- The RBA is widely expected to keep its cash rate steady at 4.35% for a second consecutive meeting.
- A weak July payrolls report created headwinds for the US Dollar, introducing rate uncertainty following dovish policy repricing.
AUD/USD regains ground after registering modest losses the previous day, trading around 0.7060 during Asian hours on Tuesday. The pair gains as the Australian Dollar (AUD) remains stronger ahead of the Reserve Bank of Australia's (RBA) interest rate decision later in the day.
The RBA is widely expected to keep the Official Cash Rate (OCR) steady at 4.35% for the second consecutive meeting on Tuesday. The decision will be announced at 04:30 GMT, accompanied by the Monetary Policy Statement (MPS) and updated economic forecasts. RBA Governor Michele Bullock’s press conference will follow at 05:30 GMT.
AUD short-term uptrend takes shape as Societe Generale flags technical resilience
Strategists at Societe Generale highlight that AUD/USD has shown notable technical resilience, observing that the pair "defended the 200-DMA in June and has since formed a series of higher highs and higher lows on the daily time chart, highlighting the onset of a short-term uptrend." This pattern underscores a constructive near-term tone for the Aussie against the USD, with the bank pointing to the evolving price structure as a key signal of improving momentum.
The AUD/USD pair appreciates as the US Dollar (USD) faces headwinds following a weaker-than-expected July payrolls report. The soft labor data sparked a dovish shift in market expectations, reintroducing two-sided policy risk into a market that had previously expected the Federal Reserve (Fed) to keep interest rates strictly on hold.
Rate Hikes Needed to Tame Inflation, Says Cleveland Fed’s Hammack
Cleveland Fed President Beth Hammack stated that the Federal Reserve will need to deliver more than one interest rate hike to successfully rein in broadening inflation. In an interview with Yahoo Finance, Hammack argued that current interest rates are not yet "meaningfully restrictive" enough to cool economic pressures.
Having already dissented at the July policy meeting in favor of an immediate rate increase, Hammack pointed to the upcoming Consumer Price Index (CPI) report as the next critical test for the central bank's policy direction.
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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