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- AUD/USD is currently trading in the vicinity of 0.6435, reflecting a decline of nearly 1% on the day.
- Earlier gains observed during the Asian trading session have been completely reversed as the currency pair weakened throughout the European and US sessions.
- The US Dollar Index (DXY) has rebounded to 100.50 after briefly dipping below the 100.00 threshold following Tuesday’s weaker-than-anticipated US CPI data.
The Australian Dollar (AUD) is currently exchanging hands near the 0.6435 level against the US Dollar (USD) on Wednesday, marking a decrease of almost 1% after failing to sustainably breach the 0.6500 psychological resistance level. The AUD/USD pair experienced a notable reversal from its session high, subsequently retreating into its established consolidation range, underscoring the persistent downward pressure on the Australian currency.
The AUD/USD pair initially saw upward momentum during the Asian trading session following the release of Australia’s Q1 wage growth figures, which surpassed expectations. Wages rose by 3.4% year-over-year, exceeding the forecasted 3.2%. However, this upward movement proved to be short-lived as the US Dollar regained its strength during the European and US trading hours, driven by renewed risk aversion and profit-taking activities.
The US Dollar Index (DXY) experienced a temporary dip below the critical 100.00 level earlier in the session, extending the bearish reaction to Tuesday’s US CPI data, which came in below consensus estimates. The softer inflation data initially fueled speculation of a potential dovish pivot by the Federal Reserve. However, the DXY subsequently recovered modestly, trading near 100.50, as market participants shifted their focus to forthcoming US economic data releases and reassessed the overall economic outlook.
Concurrently, market expectations remain tilted towards a potential interest rate cut by the Reserve Bank of Australia (RBA) at its upcoming May 20 meeting. The ASX RBA Rate Tracker currently indicates a 54% probability of a 50-basis point reduction in the cash rate. This expectation contrasts with the Federal Reserve’s (Fed) current stance of maintaining a cautious approach, thereby reinforcing the prevailing narrative of monetary policy divergence between the two central banks. The differing policy outlooks continue to exert downward pressure on the AUD/USD exchange rate.
Looking ahead, market participants are keenly awaiting key US economic data releases scheduled for Thursday, including the Producer Price Index (PPI), retail sales figures, initial jobless claims, and a highly anticipated speech by Fed Chair Jerome Powell. These events are poised to provide further insights into the health of the US economy and potentially shape near-term interest rate expectations, which could significantly influence the trajectory of the USD and, consequently, the AUD/USD pair. Any hawkish signals from the Fed could further strengthen the USD, while dovish remarks could lead to a weakening of the currency.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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