The Australian Dollar (AUD) saw a further decline against the US Dollar (USD) on Wednesday, dropping below the 0.6730 level. The declining trend from Monday and Tuesday continued as profit-taking by investors intensified. However, the economic landscape suggests that the AUD has the potential to withstand falls against the USD due to differing monetary policies between the Federal Reserve and the Reserve Bank of Australia (RBA).
Despite the uncertainties surrounding the Australian economy, high inflation rates are prompting the RBA to delay any rate cuts, which could prevent the AUD from falling further. The RBA is expected to be one of the last central banks among G10 countries to implement rate cuts, which could support an upward movement for the AUD in the near future.
Investors are closely watching the Australian Employment data scheduled for release on Thursday. The forecast suggests that around 20,000 new jobs were added in June, similar to the figures from May. If the unemployment rate remains stable at 4.0%, it could indicate a strong labor market, potentially boosting expectations of the RBA taking a more hawkish stance.
In contrast, the US market is anticipating a potential rate cut by the Federal Reserve in the near future as signs of inflation easing become more apparent. Currently, market projections are indicating a nearly 50% chance of the RBA increasing rates in either September or November, while the likelihood of a rate cut by the Federal Reserve in September is also being factored in. The divergent monetary policies of the Fed and RBA could limit the losses of the AUD/USD pair.
Despite the recent losses, the overall outlook for the AUD/USD pair remains positive. The pair has maintained levels not seen since the beginning of the year, despite a slight correction prompted by indicators like the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) reaching overbought territory. Buyers aim to maintain stability within the 0.6700-0.6730 range to keep the short-term outlook positive.
Central banks play a crucial role in ensuring price stability within a country or region. Their primary mandate is to keep inflation in check by adjusting their policy rate. Central banks like the US Federal Reserve, the European Central Bank, and the Bank of England strive to maintain inflation close to 2% through their monetary policy decisions. By adjusting the benchmark interest rate, central banks influence savings and lending rates, impacting the overall economy.
Central banks are typically politically independent and consist of policy board members with varying views on monetary policy. Members labeled as ‘doves’ advocate for loose monetary policies to stimulate economic growth, while ‘hawks’ prefer higher interest rates to keep inflation under control. The central bank chairman leads policy meetings and communicates the current monetary stance and outlook to the public. The central bank aims to implement monetary policy changes without causing extreme market reactions, and members are restricted from speaking publicly in the days leading up to a policy meeting.
