Australian Dollar weakens to near 0.7200 as traders await US PPI inflation data
- AUD/USD softens to around 0.7215 in Thursday’s early Asian session.
- Traders await key US inflation data this week that would provide clues to the Fed’s monetary policy.
- RBA’s Hunter said further tightening may be needed to curb inflation.
The AUD/USD pair declines to near 0.7215 during the early Asian trading hours on Thursday. Markets turn cautious as traders brace for the release of the US inflation data later this week. Additionally, rising tensions in the Middle East could weigh on riskier currencies such as the Australian Dollar (AUD) against the US Dollar (USD).
Traders raise their bets on an interest rate hike by the Federal Reserve (Fed) following the recent stronger US jobs data. The market is pricing in about 60% odds of an interest rate hike at the central bank’s policy meeting next week, according to the CME FedWatch Tool.
Market participants will take more clues from the upcoming Producer Price Index (PPI) data due on Thursday and Consumer Price Index (CPI) data on Friday. These inflation reports could offer some hints about the monetary policy outlook of the Fed ahead of its meeting next week.
“A hot CPI print would all but seal a September hike and underpin a firmer dollar,” said Elias Haddad at Brown Brothers Harriman & Co. “A cooler reading would strengthen the case for a hold and leave the dollar vulnerable to a dovish Fed repricing.”
Hawkish signals from Reserve Bank of Australia (RBA) officials could provide some support to the Aussie. RBA Assistant Governor Sarah Hunter said on Tuesday that the central bank may need to raise interest rates again if inflation proves more persistent than expected, keeping alive the prospect of another hike at its September meeting.
RBA hawkish tilt aligns with US policy preferences
Analysts at Rabobank note that the Reserve Bank of Australia has turned more overtly hawkish after RBA official Hauser delivered what they describe as a “hawkish speech,” which has “markets thinking of hikes this month and in November.” They add that this shift is “very much what the US Treasury would like to see – plus a lot more action on non-housing parts of the economy,” underscoring how a more restrictive RBA stance, particularly beyond the housing sector, dovetails with US policy preferences and supports a firmer near-term outlook for the Aussie.
Technical Analysis: AUD/USD maintains a constructive outlook above the 100-day SMA
In the daily chart, AUD/USD holds above the 20-day simple moving average (SMA) and comfortably over the 100-day SMA, which together suggest a constructive near-term bias. Price is pressing the upper half of the Bollinger envelope, while the Relative Strength Index (RSI) at about 67 stays just below overbought territory, hinting that bullish momentum remains firm but may be nearing stretched conditions.
On the downside, initial support emerges at the Bollinger mid-line around 0.7165, with the lower Bollinger band and the 100-day SMA close to 0.7080forming a secondary demand area if a deeper pullback unfolds. On the topside, the immediate hurdle is the Bollinger upper band at approximately 0.7250; a sustained break above this barrier would open the door for an extension of the current advance, while failure here could see the pair ease back toward the aforementioned supports.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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.
