AUD/USD shows a further decrease since Tuesday falling below 0.6730.
Australian labor data will dictate short-term dynamics that might prompt a more hawkish RBA.
Strong US data might now be enough to close the divergence between the Fed and RBA stance.
The Australian Dollar (AUD) continued to lose ground against the USD on Tuesday, falling to 0.6730. After an initial decline in Monday’s session, the AUD has extended its losses as profit booking by investors heightens. However, the fundamental outlook hints at the AUD’s potential resilience against the USD amidst monetary policy divergences between the Federal Reserve and the Reserve Bank of Australia (RBA).
Despite signs of frailty in the Australian economy, stubbornly high inflation has put the brakes on the RBA’s intention of lowering interest rates. It is anticipated that the RBA will be one of the last central banks among the G10 countries to begin cutting rates, a factor that might limit the AUD’s downside and extend its gains.
Daily digest market movers: AUD may see an upside as the labor market could justify a hike
Investors are keeping a close eye on the Australian Employment data due for release on Thursday. The report is forecasted to show that in June, 20,000 job-seekers found employment, compared to 39,700 in May.
If the unemployment rate remains steady at 4.0%, it signifies a robust labor market that may further fuel expectations of the RBA’s policy-tightening stance.
On the US data front, retail sales remained flat at 0.0%, though the previously reported increase of 0.1% was revised upward to 0.3%.
Retail Sales ex Autos rose by 0.4% after the 0.1% decline in May. That same -0.1% has been revised to 0.1%.
Market pricing currently indicates nearly a 50% chance of the RBA increasing rates in either September or November. Conversely, the odds of a rate cut by the Federal Reserve in September stand at 90%, subject to incoming data.
Technical Analysis: AUD/USD enters consolidation phase, overall outlook remains positive
Despite the recent losses, the AUD/USD’s outlook remains positive, with the pair retaining levels not seen since January. Following a rally of over 1.5% in July, indicators including the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) approached overbought territory which prompted a slight correction.
The target for the buyers is to sustain between the 0.6700-0.6730 range while support levels are marked at 0.6680 and 0.6650.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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