Australian Dollar declines after RBA raises interest rate by 25 bps to 4.10%

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AUD/USD trades in negative territory around 0.7060 in Tuesday’s Asian session.
RBA raised its OCR by 25 bps to 4.10% at its March meeting, as expected.
The Fed is set to hold interest rates steady at its March meeting on Wednesday.

The AUD/USD pair attracts some sellers to near 0.7060 during Asian trading hours on Tuesday. The Australian Dollar (AUD) edges lower against the US Dollar (USD) after the Reserve Bank of Australia (RBA) interest rate decision. Traders will keep an eye on the RBA press conference later on Tuesday at 4:30 GMT for more cues about the interest rate outlook.

As widely expected, the RBA hiked the Official Cash Rate (OCR) by 25 basis points (bps) to 4.10% from 3.85% after concluding its March monetary policy meeting. RBA Governor Michele Bullock is set to deliver a press conference explaining the monetary policy decision later in the day. Any hawkish remarks from policymakers could boost the Aussie against the Greenback in the near term.

All eyes will be on the US Federal Reserve (Fed) interest rate decision later on Wednesday. The Fed is expected to keep its benchmark interest rate unchanged in the current range of 3.50% to 3.75% when it concludes its two-day meeting on Wednesday.

Rising energy prices since the beginning of the Iran war have led analysts to push back their rate-cut expectations. Goldman Sachs economists scrapped their forecast for a Fed rate cut in June based on “a higher inflation path.” They predicted cuts in September and December, versus June and September previously.

Australian Dollar FAQs

What key factors drive the Australian Dollar?

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.

How do the decisions of the Reserve Bank of Australia impact the Australian Dollar?

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.

How does the health of the Chinese Economy impact the Australian Dollar?

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.

How does the price of Iron Ore impact the Australian Dollar?

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.

How does the Trade Balance impact the Australian Dollar?

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.