The AUD/USD pair extends its downward trajectory as markets brace for the Reserve Bank of Australia’s (RBA) upcoming decision next week. The Federal Reserve’s forecast of higher interest rates continues to support the US dollar, exerting additional pressure on the Australian currency. Friday saw an empty Australian economic calendar, while the US dollar experienced minimal intraday losses due to softer-than-expected University of Michigan (UoM) consumer sentiment figures. As traders anticipate the RBA’s policy announcement, the interplay between these economic factors sets the stage for potential volatility in the AUD/USD pair.
Australia’s currency, the Aussie Dollar (AUD), took a tumble against its US counterpart (USD) this week. This comes despite positive Australian labor market data that hinted at a more aggressive (hawkish) stance from the Reserve Bank of Australia (RBA). The story seems to be one of shifting global winds. The US Dollar (Greenback) is strengthening as investors anticipate a more cautious approach to rate cuts from the Federal Reserve (Fed), with some members even hinting at fewer cuts than previously expected. Interestingly, even soft economic data from the University of Michigan (UoM) couldn’t dampen the Greenback’s momentum.
Australia’s economic outlook remains murky. While signs of weakness are emerging, stubbornly high inflation is forcing the RBA to hold off on interest rate cuts, potentially putting a floor under the AUD’s decline. All eyes are on the RBA meeting next Tuesday for further clues. While the market currently expects the first rate cut not to arrive until May 2025, there’s a chance it could come sooner.
Some Fundamental Outlook on the Australian Dollar
Friday brought no notable updates from the Australian economy, leaving the AUD/USD pair to be influenced mainly by US economic data. In the US, consumer confidence weakened as the University of Michigan’s Consumer Sentiment Index fell to 65.6 in June, down from 69.1 in May, significantly below market expectations of 72. The Current Conditions Index also declined, dropping to 62.5 from 69.6, while the Consumer Expectations Index saw a slight decrease to 67.6 from 68.8.
The survey details revealed that the one-year inflation expectation remained stable at 3.3%, while the five-year inflation outlook increased to 3.1% from 3%. Earlier in the week, stronger-than-expected employment data for May had fueled speculation that the Reserve Bank of Australia (RBA) would keep its Official Cash Rate unchanged for the rest of the year. Additionally, the Australian unemployment rate decreased to 4.0% in May, aligning with projections, down from 4.1% in April.
On the Federal Reserve’s side, market expectations for rate cuts have continuously conflicted with the Fed’s projections for maintaining rates through 2024. According to the CME’s FedWatch Tool, there remains over a 60% chance of at least a 25 basis-point rate cut on September 18. This ongoing divergence between market hopes and the Fed’s projections continues to support the US dollar, adding to the downward pressure on the AUD/USD pair.
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