Australian Dollar starts the week higher, markets await key inflation data

  • Australian Dollar’s downside is limited by hawkish RBA outlook.
  • Market delays expectation for RBA interest rate cuts to February 2025.
  • May’s CPI figures will be key for markets to place their bets on the next RBA moves.

Monday’s session noted a recovery in the Australian Dollar (AUD) and the AUD/USD found support at the 0.6640 threshold, where the 20-day Simple Moving Average (SMA) converges. The highlight will be Australian inflation data eyed to shape ensuing RBA decisions.

In Australia, despite noticeable frailties in the economy, stubborn inflation continues to clog the Reserve Bank of Australia’s (RBA) road to potential interest rate cuts, thus setting a possible limit to the downside pressure on the Aussie. The RBA is now placed among the last G10 nations’ central banks to initiate rate cuts, with this stance expected to bolster the Australian Dollar’s upcoming gains.

Daily Digest Market Movers: Aussie up ahead of key May CPI

  • Investors are now eagerly waiting for Wednesday’s release of the May Consumer Price Index (CPI) data, expecting the headline inflation to sneak up two points to reach a five-month high of 3.8% YoY.
  • The swaps market hints at virtually no rate cuts in 2024 and around 70% odds of the first cut in February 2025, hinting at the RBA’s hawkish approach toward tackling inflation.
  • Last week, Governor Bullock uncovered the RBA’s inclination and sent the markets a clear message of resilience in the face of inflationary pressures. The Board’s insistence that “inflation remains above target and is proving persistent” and its expectation that it “will be some time yet before inflation is sustainably in the target range”, further asserts the central bank’s tough stance.
  • As the RBA doesn’t consider rate cuts, the Aussie’s downside is limited.

Technical analysis: AUD/USD recovers, buyers defend 20-day SMA

On the technical front, flat movements are noted as the Relative Strength Index (RSI) remains above 50 but flattened. Simultaneously, the Moving Average Convergence Divergence (MACD) lingers in negative territory with steady red bars. The upcoming sessions hinge on the buyers maintaining the AUD/USD pair above the 20-day Simple Moving Average (SMA), whose strong defense is currently casting a positive light on the pair’s future outlook.


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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