AUD/USD faces pressure near 0.6380 ahead of flash US PMI, Fed policy in focus
- AUD/USD faces resistance near 0.6380 ahead of preliminary US S&P Global PMI data for December.
- The Fed is almost certain to cut interest rates by 25 bps on Wednesday.
- Upbeat Australian employment data weighs on RBA dovish bets.
The AUD/USD pair surrenders its intraday gains and turns flat after failing to extend its upside move above 0.6380 in Monday’s North American session. The Aussie pair gives up gains as the US Dollar (USD) recovers its intraday losses ahead of the United States (US) flash S&P Global Purchasing Managers’ Index (PMI) data for December, which will be published at 14:45 GMT.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, wobbles near 107.00.
Economists expect the US Composite PMI to have expanded but at a slower pace due to cooler growth in the services sector and a sharp contraction in the manufacturing sector. Investors will also pay close attention to new orders data and respondents’ views on likely protectionist policies by upcoming President-elect Donald Trump.
The Federal Reserve’s (Fed) monetary policy decision, which will be announced on Wednesday, will be the major trigger for the US dollar this week. According to the CME FedWatch tool, traders fully priced in a 25-basis-point (bps) interest rate reduction to 4.25%- 4.50%.
Investors will also focus on the Fed’s dot plot and the inflation outlook to know whether officials see Federal Fund rates heading in the medium and long term. According to a Bloomberg survey, the Fed is expected to deliver three interest rate cuts in 2025.
Meanwhile, the Australian Dollar (AUD) will be influenced by market expectations about when the Reserve Bank of Australia (RBA) will start reducing interest rates. RBA dovish bets faded after the Australian employment data came in better than expected.
The Australian economy added 35.6K workers, higher than estimates of 25K and the former release of 12.1K. The Unemployment Rate surprisingly fell to 3.9% from 4.1% in October, which was expected to accelerate to 4.2%.
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.