AUD/USD Price Forecast: Holds breakout near 0.7100
- AUD/USD flattens near its two-month high of 0.7130 amid a broader weakness in the US Dollar.
- The Fed is expected to leave interest rates unchanged at the September meeting.
- Investors await the Australian employment data for July.
The Australian Dollar (AUD) trades almost flat at around 0.7100 against the US Dollar (USD) during the European trading session on Tuesday, but is close to its over two-month high of 0.7130 posted on Monday.
The Aussie pair trades broadly firm as the US Dollar is under pressure, with financial markets pricing out the possibility of a Federal Reserve (Fed) interest rate hike in September.
Fed seen on extended pause as softer US data tempers hike bets
Analysts at HSBC Asset Management highlight that "market pricing for a September Federal Reserve rate hike has fallen to its lowest level since mid-June," as investors reassess the policy outlook in light of recent communications and data. They note that, "wedged between Warsh’s comments and the benign CPI print, a softer labour report has also weighed on rate expectations," reinforcing the perception that the Fed can afford to stay patient. HSBC adds that "if August inflation and employment data show more of the same, the Fed is likely to stay on hold in September."
According to TD Securities, this pause could extend well beyond the near term. The bank states, "we expect the Fed to remain on hold over our forecast horizon. Inflation should remain high for the rest of the year, and the labor market has stabilized, allowing the FOMC to shift focus to its inflation mandate." Together, the two institutions underscore a growing consensus that softer US data and a stable labour backdrop are tilting the balance toward an extended period of unchanged policy rates.
At press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades marginally higher to near 99.65. The USD Index rebounded slightly on Monday after posting a fresh two-month low near 99.30.
On the Australian Dollar front, investors await the employment data for July, which will be released on Thursday. The labor market data is expected to show that the economy created 15K jobs, significantly lower than 73.6K in June. The Unemployment Rate is seen as steady at 4.4%.
AUD/USD Technical Analysis
AUD/USD trades at 0.7103, extending its advance above the 20-day exponential moving average (EMA) at 0.7043 and retaining a constructive bullish tone. The location of price over this short-term trend gauge suggests buyers remain in control, while the Relative Strength Index (14) at 64.6 stays below overbought territory yet signals firm positive momentum.
On the downside, 0.7080 is the immediate support level, with the 20-day EMA at 0.7043 acting as the next key support. On the upside, the pair would extend the advance towards the May 29 high at 0.7200 if it breaks above the two-month high at 0.7130.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
US Dollar FAQs
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.
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.
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.
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.
