AUD/USD registered sharp declines on Monday towards 0.6640.
During the Asian session, the PBOC loan prime rate was cut by 10 basis points.
Aussie’s stability is supported by the hawkish RBA stance, which remains reluctant to embrace cuts.
In Monday’s session, the Australian Dollar (AUD) presented additional losses against the USD, with AUD/USD beginning the new week around 0.6640. This loss is largely attributed to falling Copper prices and the People Bank’s of China rate cut of 10 basis points. Revised Gross Domestic Product (GDP) Q2 figures and Personal Consumption Expenditures (PCE) from the US, along with Judo PMIs from Australia, are anticipated to shape the week’s trading direction.
Despite some signs of weakness in the Australian economy, stubbornly high inflation continues to prompt the Reserve Bank of Australia (RBA) to delay rate cuts, potentially limiting any further decline in the AUD. The RBA maintains its stance amongst the last central banks within the G10 countries likely to begin rate cuts, a commitment that could extend the AUD’s recent gains.
Daily digest market movers: Aussie down on PBoC rate cut and falling copper prices, markets await new data to get fresh clues on the RBA’s stance
The People’s Bank of China (PBoC) announced new interest rates. The 5-year interest rate was set at 3.85%, which fell short of the expected 3.95%. Similarly, the 1-year interest rate was adjusted to 3.35%, below the anticipated 3.45%.
In addition, Copper prices fell by nearly 1% on Monday which weighed on the Australian currency as Australia is a big export.
The Australian Bureau of Statistics (ABS) confirmed last week strong employment figures but that the Unemployment Rate ticked higher to 4.1%, up from 4.0%.
The reaction of the Reserve Bank of Australia (RBA) to this data will be closely watched, but as for now, the bank isn’t giving signs of easing on its hawkish stance.
Meanwhile, the market currently predicts a 50% likelihood of the RBA implementing a rate hike either in September or November, reflecting the bank’s hawkish stance.
For the Federal Reserve, the chances of a rate cut in September stand at approximately 90%, near to being priced in.
However incoming data from both countries will continue shaping those expectations.
AUD/USD Technical analysis: AUD/USD plunges and remains below the 20-day SMA
While the AUD/USD pair has entered a correction period after early July’s sharp gains, the main concern lies with the loss of the core support around 0.6000-0.6040. As technical indicators such as the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) hint at weakening momentum, a deeper downside might be looming unless the pair retains the mentioned range.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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