Australian Dollar strong after US PCE figures
- AUD rose against USD due to US inflation reduction and a potential dovish stance from the Fed.
- Soft PCE data from the US may benefit the Aussie policy divergence between the RBA and Fed.
- RBA’s delayed rate cuts could bolster the Aussie, contrasting with other G10 central banks’ reduction strategies.
Friday’s session recorded a significant uplift in the Australian Dollar (AUD) against the US Dollar following an unexpected inflation reduction in the US in May. As a result, expectations of a possibly dovish stance from the Federal Reserve (Fed) grew, leading to a likely divergence in policy with the Reserve Bank of Australia (RBA).
The Australian economy demonstrates minor signs of weakness. However, the heightened inflation rates maintain a stubborn resilience, preventing the RBA from implementing potential rate cuts. The RBA is foreseen delaying rate cuts, making it one of the last G10 country central banks to adopt a reduction policy. These delayed cuts might enhance the further strengthening of the Aussie.
Daily digest market movers: Aussie continues to strengthen amid robust CPI figures
- In terms of the data at hand, the Australian Dollar’s strength was bolstered by increased expectations of the RBA further hiking rates after hot Consumer Price Index (CPI) data reported earlier in the week.
- Market indications are now pricing in approximately 40% odds of a 25-basis-point rate hike from RBA on September 24, extending to 50% leading up to November 5.
- US inflation fell to 2.6% YoY in May from 2.7% in April, according to the US Bureau of Economic Analysis. This decrease matched market expectations.
- On a monthly basis, the Personal Consumption Expenditures (PCE) Price Index remained static. The core PCE Price Index rose by 2.6%, a decrease from the 2.8% escalation that was recorded in April.
- As a result, this downtrend toward the Fed’s 2.0% target bumped the probability of a Fed interest rate cut in September to 66%, up from 64% prior to the PCE release, as per the CME FedWatch Tool.
Technical analysis: AUD/USD maintains buyer interest above 20-day SMA
From a technical outlook, the indicators displayed signs of recovery with the Relative Strength Index (RSI) staying above 50, and the Moving Average Convergence Divergence (MACD) printing a fresh green bar. Critical to the future momentum of the pair will be the defense of the 20-day Simple Moving Average (SMA) at 0.6640. As long as buyers manage to sustain above this key level, the future outlook appears promising.
Notably, on Friday, the pair managed to lift back above the 20-day SMA, after dipping to a low of 0.6620, a key indication that buyer defenses remain robust.
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.