The USD recovered on signs of sticky inflation in July’s PCE, causing the AUD/USD to decline by 0.70% to 0.6750. Despite this, the RBA’s hawkish stance may limit further declines in the AUD. The RBA has maintained its Overnight Cash Rate at 4.35%, showing a cautious approach due to ongoing inflation concerns. Governor Bullock has emphasized the RBA’s readiness to hike rates further if necessary. Copper and iron ore price gains have also contributed to the AUD’s upside momentum, despite US PCE inflation data showing core inflation rising slower than estimated, indicating a sticky underlying inflation.
The RBA plays a crucial role in managing monetary policy for Australia by setting interest rates to maintain price stability and contribute to the stability of the currency and economic prosperity. Traditionally, inflation has been viewed as a negative factor for currencies, but in modern times, higher inflation tends to lead central banks to raise interest rates, attracting more capital inflows and increasing demand for the local currency, such as the Aussie Dollar. Macroeconomic data, such as GDP, PMIs, employment, and consumer sentiment surveys, can impact the value of a currency, with a strong economy potentially leading to the RBA raising interest rates to further support the AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to stimulate the economy. The RBA prints more AUD to buy assets like government bonds to provide liquidity to financial institutions. QE usually results in a weaker AUD due to the increased money supply. On the other hand, Quantitative Tightening (QT) is the reverse of QE, undertaken when the economy is recovering and inflation is rising. In QT, the RBA stops buying more assets and reinvesting maturing bonds, which can be positive for the Australian Dollar.
The AUD/USD technical outlook shows bearish momentum as the pair loses the 0.6800 level. The RSI is pointing down, indicating increasing selling pressure, while the MACD shows flat green bars, suggesting bullish traction is fading. Buyers may be taking a breather after August’s rally, with key support levels at 0.6750 and 0.6730 and resistance levels at 0.6800 and 0.6830. The divergence between the Fed and RBA could limit the downside for the pair.
The recovery momentum in AUD throughout August has been supported by the weak USD and improved conditions of risk-related assets. The RBA’s hawkish stance continues to benefit the Aussie despite a complex economic outlook. Financial markets anticipate a modest interest rate reduction by 2024, reflecting the RBA’s response to persistent inflation. Despite the USD’s strength in response to July’s PCE figures, continued copper and iron ore price gains, as well as Governor Bullock’s emphasis on potential rate hikes, could support the AUD’s upside momentum.
