The Australian Dollar (AUD) saw a rise against the US Dollar following a decrease in US inflation in May. This unexpected reduction in inflation led to speculations of a possible dovish stance from the Federal Reserve (Fed), creating a potential policy divergence with the Reserve Bank of Australia (RBA).
Despite minor weaknesses in the Australian economy, the stubborn resilience in inflation rates has prevented the RBA from implementing rate cuts. As a result, the RBA is expected to delay these cuts, making it one of the last G10 central banks to adopt a reduction policy. This delay could contribute to further strengthening of the Aussie.
The strength of the Australian Dollar was further supported by the anticipation of the RBA potentially hiking rates after strong Consumer Price Index (CPI) data earlier in the week. Market indicators are now pricing in a 40% chance of a 25-basis-point rate hike by the RBA on September 24, increasing to 50% by November 5.
On the US front, inflation fell to 2.6% YoY in May from 2.7% in April, aligning with market expectations. The Personal Consumption Expenditures (PCE) Price Index remained stable on a monthly basis, while the core PCE Price Index saw a decrease to 2.6% from 2.8% in April. This downward trend towards the Fed’s 2.0% target has raised the likelihood of a Fed interest rate cut in September to 66%.
From a technical perspective, the Australian Dollar maintained buyer interest above the 20-day Simple Moving Average (SMA). The Relative Strength Index (RSI) stayed above 50, and the Moving Average Convergence Divergence (MACD) showed positive signs, indicating a promising future outlook as long as the pair remains above the 20-day SMA.
The Reserve Bank of Australia (RBA) plays a crucial role in setting interest rates and managing monetary policy for Australia. The primary mandate of the RBA is to maintain price stability, with an inflation rate target of 2-3%. The RBA uses tools like raising or lowering interest rates to achieve its mandate, which can impact the value of the Australian Dollar.
In modern times, moderately higher inflation tends to lead central banks to raise interest rates, attracting capital inflows and strengthening the local currency. Macroeconomic data, such as GDP, PMIs, and employment figures, can influence the value of the Australian Dollar. Tools like Quantitative Easing (QE) and Quantitative Tightening (QT) are used in extreme economic situations to manage liquidity and affect the value of the currency.
Investors should conduct thorough research before making any investment decisions, as the financial markets involve risks and uncertainties. The views expressed in this article are solely those of the author and do not constitute investment advice.