Australian Dollar strengthens to near 0.7000 as soft US CPI tempers Fed tightening bets
- AUD/USD edges higher to near 0.6990 in Wednesday’s early European session.
- The US launched fresh Iran strikes as Trump announced the Hormuz blockade.
- Softer-than-expected US CPI data in June tempered expectations for Fed policy tightening.
The AUD/USD pair gathers strength to around 0.6990 during the early European trading hours on Wednesday. The US Dollar (USD) softens against the Australian Dollar (AUD) as markets reduced their bets of a US rate hike after US inflation slowed more than expected in June. Traders await the release of the US June Producer Price Index (PPI) report for fresh impetus.
US inflation, as measured by the US Consumer Price Index (CPI), eased to 3.5% in the 12 months through June, down from 4.2% in May, the US Bureau of Labor Statistics reported on Tuesday. This figure came in softer than the market expectations of 3.8%. The core CPI, excluding food and energy, increased 2.6% YoY in June compared to a rise of 2.9% in May, below the market consensus of 2.8%.
Traders have priced in nearly a 16.6% probability of a quarter-percentage-point rate increase at the Fed's July 28-29 meeting, versus 35% before the inflation report, according to the CME FedWatch tool. They give a hike at the Fed's September 15-16 meeting about a 60% odds, down from more than 90% before the release of the CPI data.
Meanwhile, escalating tensions in the Middle East could boost a safe-haven currency such as the Greenback and act as a headwind for the pair in the near term. CNN reported on Wednesday that the US launched and completed the fourth day of strikes on Iranian targets. Iranian state media also reported that Tehran struck US military assets in Jordan.
US President Donald Trump warned that the US would strike bridges and power plants next week unless Tehran returns to the negotiating table. Earlier this week, Trump announced the US will not impose a 20% reimbursement fee on cargo moving through the Strait of Hormuz.
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.
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