Australian Dollar remains under pressure ahead of RBA
- AUD/USD slips amid ongoing bearish sentiment, approaching key support level.
- Economic weakness in Australia intensifies rate-cut expectations for the RBA.
- Technical indicators suggest a potential correction, but bearish momentum remains dominant.
The Australian Dollar (AUD) encountered some selling pressure against the US Dollar (USD) on Monday, declining by 0.50% to 0.6480. During the European session, it fell to its lowest since November 2023 around 0.6350 as risk-off flows dominated the markets, while investors await Tuesday’s Reserve Bank of Australia (RBA) decision for further direction.
Despite persistent high inflation, recent data has pointed to weaknesses in the Australian economy. This has prompted markets to shift their expectations from a potential rate hike by the RBA to a rate cut by year-end. The RBA is expected to keep rates steady at 4.35% at its meeting on Tuesday, but investors will be closely monitoring the central bank’s policy guidance for any hints of a more dovish stance.
Daily digest market movers: Aussie down as markets digest PMIs ahead of RBA
- Australia’s July services and composite PMIs were weaker than expected, with the composite reading falling below 50 for the first time since January.
- The Melbourne Institute Monthly Inflation Gauge showed a decline in inflation to within the RBA’s target band.
- The RBA is expected to maintain a neutral policy stance despite inflation remaining above its target range.
- The highlight will be that the RBA will publish new sets of forecasts in its Statement on Monetary Policy, which will guide markets on the next interest rate bets.
AUD/USD technical analysis: Bears continue in command, correction still possible
The AUD/USD pair continues to trade beneath its key Simple Moving Averages (20, 100 and 200-day SMAs), indicating a prevailing bearish sentiment. The Relative Strength Index (RSI) also suggests bearishness, with values hovering between 30-37 in recent sessions. The Moving Average Convergence Divergence (MACD) maintains red bars, further reinforcing the negative momentum.
However, the AUD/USD pair has found some support near the 0.6480 and 0.6350 levels, which could potentially act as a temporary floor. Resistance is anticipated around the 0.6560-0.6570 zone, where selling pressure has previously capped rallies.
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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