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Australian Dollar extends drop after Fed’s favourite inflation guage shows upswing


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  • The Australian Dollar plunges through support following the release of US Q2 GDP. 
  • Downside pressure maintains on the Aussie after the release of US PCE inflation data for June.
  • The Fed Chairman said he could not confirm if there would be further rate hikes, noted a fall in Core CPI and strength in the labor market.

The Australian Dollar (AUD) plummets against the US Dollar (USD) on Friday, breaking through all major daily Simple Moving Averages (SMA) as it extends loses after the release on Thursday of better-than-expected US GDP data for the second quarter. An unexpected rise in the Federal Reserve’s (Fed) preferred inflation gauge, Personal Consumption Expenditure (PCE), on a month-on-month basis, on Friday, keeps up the downside pressure on the pair. 

Headline PCE rose by 0.2% on a MoM basis in June – well above the -0.1% forecast and the 0.1% previous, according to data from the US Bureau of Economic Analysis. On a YoY basis PCE rose by only 3.0%, which was below the 3.1% expected and 3.8% reported in May. 

Core PCE gained 0.2% MoM, inline with expectations and below the previous month of May’s 0.3%. On a YoY basis it showed a lower 4.1% increase in prices compared to the 4.2% expected and 4.6% previous. 

AUD/USD trades in the upper 0.66s during the US session on Thursday.  

Australian Dollar news and market movers 

  • The Australian Dollar weakens versus the US Dollar after US GDP data shows stronger-than-expected growth. 
  • A rise in monthly inflation according to the Fed’s preferred gauge, the PCE index, adds further downside pressure on the Aussie as it suggests bouyant inflation and the potential for higher interest rates in the US, which would be favorable for the Buck. 
  • US Gross Domestic Product (GDP) expanded at an annualized rate of 2.4% in the second quarter, first estimates showed on Thursday. This reading followed the 2% growth recorded in the first quarter and surpassed the market expectation of 1.8% by a wide margin.
  • Durable Goods Orders jumped 4.7% on a monthly basis to reach $302.5bn, according to the US Department of Commerce, in seasonally adjusted terms. 
  • Initial Jobless Claims decreased by 7,000 to 221,000 in the week ending July 22 – below the 235,000 gain forecast. Continuing Claims fell to 1.69 million versus the 175M forecast.
  • The Australian Dollar rebounded following the Fed meeting. The FOMC raised rates by 0.25% – as expected. However, Chairman Powell showed more-than-expected optimism in his post-meeting press conference.
  • Powell noted how core inflation was coming down, how the labor market was showing remarkable resilience, and how the Fed would be taking a meeting-by-meeting approach to policy from now on. The market interpreted this as a dovish turn. 
  • The release of Australian Consumer Price Index (CPI) data for Q2 dragged the Aussie lower early Wednesday after it showed a steeper-than-expected slowdown in inflation. 
  • Australian CPI inflation came out at 6.0% in Q2 YoY when 6.2% had been forecast versus the 7.0% in Q1. 
  • The Reserve Bank of Australia’s (RBA) preferred gauge, RBA Trimmed Mean CPI, measured quarterly, increased by 5.8% YoY in Q2 versus the 6.0% rise estimated and the 6.6% of Q1.
  • There is a risk that the RBA will have to cut rates in 2024 because the Australian housing market is dominated by variable-rate mortgages so it is more sensitive to interest rates, and homeowners have recently been adversely affected by higher mortgage repayments, according to Bloomberg Intelligence, as quoted by Financial Review. 
  • The RBA’s Cash Rate is 4.1%, which is below the Fed’s 5.50%, overall favoring capital flows to the Greenback versus the Aussie. 
  • China’s pledge to increase support for the economy on Monday has helped the Australian Dollar since it is Australia’s largest trading partner. 

Australian Dollar technical analysis 

AUD/USD is in a sideways trend on both the long and medium-term charts. The February high at 0.7158 is a key hurdle, which if vaulted, will alter the outlook to one that is more bullish longer term. 

Likewise, the 0.6458 low established in June is a key level for bears, which if breached decisively, would give the chart a more bearish overtone from a longer-term perspective. 

Australian Dollar vs US Dollar: Weekly Chart

The confluence of support made up of all the major daily SMAs – the 50, 100 and 200 – that formed a barrier in the upper 0.66s and lower 0.67s has given way overnight. If the exchange rate manages to close well below the SMAs on a daily basis then a decisive break will suggest more downside it on the cards. 

Australian Dollar vs US Dollar: Daily Chart

From a bullish perspective, a recovery and decisive break above the June 16 high at 0.6900 would now be required to save the day and provide stronger confirmation of a more bullish outlook. 

A decisive break consists of a long daily candlestick, which pierces cleanly above or below the critical level in question and then closes near to the high or low of the day. It can also mean three up or down days in a row that break cleanly above or below the level, with the final day closing near its high or low and a decent distance away from the level. 

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.