- AUD/USD extended its decline in Monday's session as market gears up for RBA decision.
- Federal Reserve's projection of higher interest rates continues to bolster the USD.
- Australian and American economic calendars remain empty on Monday.
The Australian Dollar (AUD) experienced additional losses against the US Dollar (USD) on Monday as markets gear up for Tuesday’s Reserve Bank of Australia (RBA) decision.
The Australian economy shows some signs of weakness, but stubbornly high inflation is prompting the RBA to delay cuts, which may limit its decline. The RBA's meeting concludes on Tuesday when investors will look for further clues. Markets are pricing in the first rate cut only for May 2025.
Daily digest market movers: Australian Dollar sustains sell-off, markets await RBA's decision
- No significant highlights were detected from the Australian economy on Friday.
- Reserve Bank of Australia meets on Tuesday and is expected to keep rates steady at 4.35%.
- The RBA is expected to stick to its neutral policy guidance that the bank is not ruling anything in or out.
- Following the May 7 meeting, Governor Bullock confirmed that the board discussed the option of raising rates. This option will likely remain on the table as inflation doesn’t show signs of easing.
- Market fully projects in a cut at the February meeting.
- Market hopes for rate cuts have persistently clashed with the Fed’s rate cut expectations through 2024, and according to the CME’s FedWatch Tool, rate markets maintain over 60% odds of at least a 25 basis-point rate trim on September 18.
Technical analysis: Sellers persist as Aussie approaches key level
The Relative Strength Index (RSI) now sits below 50 and points downwards, indicating negative momentum. Meanwhile, the Moving Average Convergence Divergence (MACD) prints steady rising red bars hinting at persistent selling pressure.
The short-term outlook has turned negative as the pair fell below the 20-day Simple Moving Average (SMA) toward 0.6613, indicating a loss in buying steam. As sellers continue to advance, the area of 0.6560-0.6550 where the 100 and 200-day Simple Moving Averages (SMAs) converge might be retested.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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