AUD/USD seems more downside below 0.6520 as US Dollar trades firmly

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The AUD/USD pair seems vulnerable near an over two-week low around 0.6520 during the European trading session on Friday.

AUD/USD struggles to hold the immediate support of 0.6520 as the US Dollar demonstrates strength.
A slight ease in Fed dovish expectations has supported the US Dollar.
Investors await the US PCE inflation and the RBA monetary policy announcement.

The AUD/USD pair seems vulnerable near an over two-week low around 0.6520 during the European trading session on Friday. The Aussie pair weakens as the US Dollar (USD) demonstrates strength, following a decline in market expectations for more interest rate cuts by the Federal Reserve (Fed) in the policy meetings remaining this year.

During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades firmly near its fresh four-week high around 98.40 posted on Thursday.

According to the CME FedWatch tool, the probability of the Fed cutting interest rates by 50 bps by the year-end eased to 62% from 78.6% seen a week ago.

Fed dovish expectations have trimmed lately as a majority of officials have expressed caution on further interest rate cuts, citing upside inflation risks.

In Friday’s session, investors will focus on the United States (US) Personal Consumption Expenditure Price Index (PCE) data for August, which will be published at 12:30 GMT. The US core PCE inflation, which is Fed’s preferred inflation gauge, is estimated to have grown at a moderate pace of 0.2% on a monthly basis against the prior reading of 0.3%, with yearly figures rising steadily by 2.9%.

Meanwhile, the next trigger for the Australian Dollar (AUD) will be the monetary policy announcement by the Reserve Bank of Australia (RBA) on Tuesday. The RBA is expected to hold its Official Cash Rate steady at 3.6%.

US Dollar FAQs

What is the US Dollar?

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

How do the decisions of the Federal Reserve impact the US Dollar?

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

What is Quantitative Easing and how does it influence the US Dollar?

In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

What is Quantitative Tightening and how does it influence the US Dollar?

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.