Australian Dollar hold ground as RBA remains hawkish
- AUD/USD registered a boost, settling near 0.6600.
- RBA maintains its hawkish position, undergirding a strengthened AUD.
- Investors to eye upcoming mid-tier Australian economic figures during the Asian session.
The AUD/USD pair experienced an increase of 0.40% during Monday’s session, settling near 0.6600. Undoubtedly, the Reserve Bank of Australia’s (RBA) unwavering hawkish stance and stronger Chinese inflation figures reported last week provide a supportive platform for the Aussie, although escalating geopolitical tensions in the Middle East might limit its upside.
Considering the mixed Australian economic outlook and high inflation, the RBA has all the reasons to remain hawkish, which might continue benefiting the Aussie.
Daily digest market movers: Aussie up after RBA’s hawkish directions last week, eyes on data later in Asian session
- The Reserve Bank of Australia held its rates steady at 4.35% for a sixth consecutive session last week, noting that “the board is not dismissing any possibilities.”
- The Bank underlined the significance of remaining vigilant toward potential inflation threats, implying a reluctance for hasty policy changes.
- Meanwhile, Westpac analysts have shifted their forecast for the first rate cut from November 2024 to February 2025. Hence, the RBA’s hawkish posture is likely to bolster the AUD in the near term.
- Investors anticipate further clues from Chinese Retail Sales and Industrial Production figures coming Thursday. Additionally, Australian Wage data from Q2 and Westpac Confidence figures from July, to be released during the upcoming Asian session, will hold the market’s attention.
AUD/USD technical outlook: Pair encounters significant resistance around 0.6600
The price action of AUD/USD over the past week reflects that the bulls are facing considerable resistance around the 0.6600 level. The Relative Strength Index (RSI) continues to hover around the neutral zone, while the Moving Average Convergence Divergence (MACD) points to a steady bullish traction. This points out that the recent bullish recovery is waiting for a fundamental catalyst to pierce through the 0.6600 level.
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.