The Australian Dollar (AUD) catches fresh bids in reaction to the Reserve Bank of Australia (RBA) Governor Michele Bullock’s remarks during the post-meeting press conference, saying that more rate cuts might not be needed. Bullock added that the board discussed circumstances in which the central bank might have to tighten. This, along with a modest US Dollar (USD) downtick, lifts the AUD/USD pair back closer to its highest level since September 18, touched on Monday, and favors bullish traders.
However, the cautious market mood could act as a headwind for the risk-sensitive Aussie ahead of the next key central bank event risk. The US Federal Reserve (Fed) is scheduled to announce its decision on Wednesday and is expected to lower interest rates again, which keeps the USD bulls on the defensive. Meanwhile, the dovish Fed expectations mark a big divergence in comparison to the RBA’s outlook and back the case for an extension of the AUD/USD pair’s move up witnessed over the past two weeks or so.
Australian Dollar remains well supported by RBA’s hawkish outlook
- The Reserve Bank of Australia decided to leave the Official Cash Rate (OCR) unchanged at 3.6% following the conclusion of the December monetary policy meeting this Tuesday. In the accompanying policy statement, the RBA said that the board will be attentive to the data and the evolving assessment of the outlook and risks to guide its decisions.
- In the post-meeting press conference, RBA Governor Michele Bullock said that inflation and jobs data will be important for the February meeting. It looks like more rate cuts are not needed, and that the Board discussed what they might have to do if rates need to go up, Bullock added further.
- There’s been a notable repricing in the markets over the past two weeks that the Reserve Bank of Australia is done cutting rates for now, as price pressures are proving to be persistent. In fact, inflation remains above the RBA’s 2% to 3% annual target and raises questions about just how much headroom the central bank has to ease policy.
- Moreover, RBA Governor Michele Bullock said last week that if inflation proves to be persistent, it would have implications for future monetary policy. Some analysts even believe that the RBA might be done with easing and could even consider tightening heading into 2026 if domestic conditions stay firm and inflation doesn’t cool.
- The US Commerce Department reported last Friday that the Personal Consumption Expenditures Price Index rose 2.8% on a yearly basis in September, matching estimates. The core gauge rose 2.8% compared to 2.9% in August, which, along with signs of a cooling US labor market, reaffirmed dovish Federal Reserve expectations.
- According to the CME Group’s FedWatch Tool, traders are pricing in a nearly 90% chance that the US central bank will lower borrowing costs by 25 basis points at the end of a two-day policy meeting on Wednesday. This should cap a modest US Dollar recovery from its lowest level since late October and support the AUD/USD pair.
- Apart from the key central bank event risks, traders will take cues from a duo of US labor market reports on Tuesday – the ADP Weekly Employment Change and JOLTS Job Openings. The focus will then shift to the FOMC decision on Wednesday and the Australian monthly employment details, due for release on Thursday.
AUD/USD could aim to retest YTD peak, levels just above 0.6700
The AUD/USD pair finds some support near the 0.6615-0.6620 resistance breakpoint. Moreover, oscillators on the daily chart are holding comfortably in positive territory and are still away from being in the overbought zone, validating the near-term constructive outlook for the currency pair. Some follow-through buying beyond the 0.6645-0.6650 region, or a multi-month top touched on Monday, will set the stage for a move towards challenging the year-to-date peak, levels just above the 0.6700 mark, touched in September.
On the flip side, weakness below the 0.6600 round figure could be seen as a buying opportunity near the 0.6560-0.6555 region. This is followed by the 100-day Simple Moving Average (SMA), around the 0.6540-0.6535 area, below which the AUD/USD pair could weaken to the 0.6500 psychological mark en route to the 0.6480 horizontal zone. Failure to defend the said support levels would negate the positive outlook and shift the near-term bias in favor of bearish traders, exposing a multi-month low, around the 0.6420 region, touched in November.
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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