- AUD/USD recovered much of its previous losses in Tuesday’s session, following RBA decision.
- USD started the week softly, and its declines extended following weak Retail Sales figures.
- If the Fed and RBA policies diverge, the Aussie might see further gains.
The Australian Dollar (AUD) witnessed sizable gains against the US Dollar (USD) following Tuesday’s Reserve Bank of Australia (RBA) meeting, which concluded with a hawkish hold.
Despite the underlying weakness in the Australian economy, stubbornly high inflation has prompted the RBA to postpone rate cuts. On the US side, disinflation signals have boosted confidence in a September interest rate cut by the Federal Reserve (Fed).
Daily digest market movers: Australian Dollar buoyant after RBA’s hawkish hold
- Reserve Bank of Australia, as widely expected, left the cash rate static at 4.35% and reiterated that “the Board is not ruling anything in or out.”
- Furthermore, Governor Bullock confirmed that the board discussed rate hike options with a rate cut not being contemplated at this time.
- Resolute tone surrounding Australia’s inflation backdrop implies that threshold for policy easement remains high.
- RBA disclosed that “inflation remains above target and proves persistent” and reiterated that “the Board anticipates it will be a while still before inflation is sustainably within the target range.”
- On the US front, the US Census Bureau released that Retail Sales, a crucial measure of household spending, grew at a slower-than-anticipated pace in May of 0.1% against the projected 0.2%.
- Slower Retail Sales growth might create significant pressure on the US Dollar, as it is set to bolster investors’ belief in the gradual disinflation process.
- CME FedWatch Tool indicates higher probabilities of interest rates starting to decrease from the September meeting, with one or more rate cuts implied in November or December.
Technical analysis: Bullish signals gain traction, pending confirmation
The Relative Strength Index (RSI) has now risen above 50, signifying a shift in momentum. Concurrently, the Moving Average Convergence Divergence (MACD) registers shrinking red bars, hinting at declining selling pressure and a potential reversal.
However, the short-term outlook remains negative unless buyers consolidate above the 20-day Simple Moving Average (SMA) now set at 0.6640. As the AUD/USD struggles with the 20-day SMA, investors should continue to monitor the region of 0.6560-0.6550, where the 100-day and 200-day Simple Moving Averages (SMAs) meet. That support level might be retested in the upcoming sessions if bulls fail to confirm their surge.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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- Source: https://www.fxstreet.com/news/australian-dollar-rebounds-following-rbas-hawkish-hold-202406181831
