Australian Dollar weakens as markets await CPI figures for directions
- Australian Dollar’s downside is supported by hawkish RBA outlook.
- Markets now hint at rate cuts not before February 2025.
- Upcoming May CPI figures will be pivotal for markets to anticipate next RBA moves.
Tuesday’s session observed a decline in the Australian Dollar (AUD) as it slipped down to the 0.6650 mark against the US Dollar, edging close to the 20-day Simple Moving Average (SMA) at 0.6640. The upcoming Australian inflation data remains in the spotlight, expected to shape future RBA moves. Low-tier data reported during the Asian sessions didn’t significantly affect the Aussie’s standing.
In Australia, despite signs of an ailing economy, the persistently high inflation acts as a roadblock to the Reserve Bank of Australia’s (RBA) possible rate cuts, potentially limiting the downside pressure on the Aussie.
Daily digest market movers: Aussie sees red ahead of CPI figures
- In June, the Westpac Melbourne Institute Consumer Confidence index in Australia saw an increase of 1.7%, reaching 83.6 compared to 82.2 in May and marked the first rise since February.
- Despite this uptick, consumer sentiment remains significantly pessimistic, with the index still far below the neutral level of 100.
- Markets are poised for Wednesday’s release of the May Consumer Price Index (CPI) data, anticipating potential changes to guide the RBA’s forthcoming decisions.
- Swaps market has reset its odds to less than a 25% chance of a rate cut by December 2024, rising to around 65% probability by February 2025, indicating the RBA’s steadfast approach to tackling inflation.
- Last week, Governor Bullock introduced a new stance, affirming the RBA “will do what is necessary” to bring inflation back to target. Consequently, with the RBA ruling out rate cuts, the downside on the Aussie is set to remain constrained.
Technical analysis: AUD/USD faces pullback, buyers aim to guard 20-day SMA
From a technical standpoint, adjustments in the indicators are noted. The Relative Strength Index (RSI) continues to stay above 50 but indicates a downtrend.
Similarly, the Moving Average Convergence Divergence (MACD) persists in the negative sphere with a sequence of red bars. Upcoming sessions are contingent on the buyers upholding the AUD/USD above the 20-day Simple Moving Average (SMA), a line of defense with the potential to set a promising momentum for the pair’s future outlook.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.