Australian Dollar gains ahead of RBA Governor Bullock’s speech
- AUD/USD appreciates amid lingering concerns over sticky inflation in Australia.
- The US Dollar holds firm ahead of looming uncertain Fed rate decision.
- The Greenback remains resilient despite Donald Trump reporting progress in Middle East talks with Iran.
AUD/USD inches higher after recovering its daily losses, trading around 0.6990 during the Asian hours on Tuesday. Traders are keeping a close watch on scheduled remarks from Reserve Bank of Australia (RBA) Governor Michele Bullock later in the day. Meanwhile, lingering concerns over sticky inflation have kept investor sentiment cautious ahead of Australia's June and Q2 consumer price reports due on Wednesday.
The AUD/USD pair could face challenges as the US Dollar (USD) stabilizes, driven by market caution ahead of the upcoming Federal Reserve policy decision due on Wednesday. According to the CME FedWatch Tool, markets are pricing in nearly a 38% chance of a rate hike in July, an unusually high level of uncertainty so close to a meeting. Citadel Securities expects the Fed to deliver a rate increase to solidify Chairman Kevin Warsh’s inflation-fighting credibility following his repeated promises to restore price stability. Looking further ahead, the probability of at least a 25-basis-point hike in September currently sits at approximately 81.4%.
The Greenback showed resilience despite President Donald Trump stating that the US is engaged in "good talks" with Iran to resolve the Middle East conflict. While Washington suspended its 13-night strike campaign over the weekend, leading to three consecutive days without attacks. Tehran’s foreign ministry countered that no direct negotiations with the US are taking place, noting its only active dialogue is with Oman regarding the future of the Strait. Even so, the diplomatic developments helped push oil prices down, easing broader inflation and monetary policy concerns.
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.
