AUD/USD trades with caution near 0.6400 as Fed Powell’s speech takes centre stage

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The AUD/USD pair trades cautiously near a fresh two-month low around 0.6400 during the European trading session on Friday. The Aussie pair is expected to remain on tenterhooks as investors await Federal Reserve (Fed) Chair Jerome Powell’s speech at the Jackson Hole (JH) Symposium at 14:00 GMT.

AUD/USD remains under pressure around 0.6400 as the US Dollar trades firmly ahead of Fed Powell’s speech.
Fed dovish speculation has slightly cooled ahead of Fed Powell’s speech at the Jackson Hole Symposium.
Preliminary Australian PMI data grew at a faster pace in August.

Investors will pay close attention to Fed Chair Powell’s speech to get fresh cues about whether the United States (US) central bank will cut interest rates in the September policy meeting.

Ahead of the Fed Powell’s speech, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, posts a fresh 10-day high around 98.80.

Meanwhile, traders have trimmed bets supporting interest rate cuts by the Fed in September. According to the CME FedWatch tool, the probability of the Fed cutting interest rates in September has eased to 73.3% from 85.4% seen a week ago.

On Thursday, Kansas City Fed Bank President Jeffrey Schmid stated that there is no rush for interest rate cuts as inflation is still above the central bank’s target of 2%.

In Australia, upbeat flash S&P Global Purchasing Managers’ Index (PMI) data for August has failed to lift the Australian Dollar. The agency reported on Thursday that the Composite PMI came in at 54.9, higher than 53.8 in July. Robust business activity in both the manufacturing and the services sectors contributed to a strong growth in the private sector.

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.