- Australian Dollar is a top performer from the session, favored by hot CPI figures from May.
- Following May’s hot CPI figures, the market closely watches further inflation indications for potential RBA action.
- If the RBA holds hawkish, the downside for the Aussie is limited.
Wednesday’s session observed an incline in the Australian Dollar (AUD), as it rose to the mark of 0.6690 against the US Dollar, before retracing back to the 0.6650 mark. The recently released Australian inflation data, which came in higher than expected, benefited the Aussie against its peers, but the Greenback itself is also trading with vigor.
In Australia, despite signs of a weaker economy, the stubbornly high inflation acts as a hindrance to the Reserve Bank of Australia’s (RBA) potential rate cuts, potentially limiting downside pressure on the Aussie.
Daily Digest Market Movers: Aussie shows resilience amid hot CPI figures
- On the data front, Australia’s May Consumer Price Index CPI ran hot. The headline came in at 4.0% YoY vs. 3.8% expected and 3.6% in the previous month.
- This marked the third consecutive month of acceleration to the highest since November, moving further above the 2-3% target range
- As a result of these developments, the swaps market is now pricing in nearly 40% odds of a 25 bps rate hike on September 24, extending to nearly 50% for November 5.
- In the last meeting, Governor Bullock affirmed the RBA “will do what is necessary” to bring inflation back to target and foresees a longer period before inflation gets sustainably back in the target range.
- Accordingly, with the RBA ruling out rate cuts and with markets potentially considering rate hikes, the downside on the Aussie is set to remain constrained.
Technical analysis: AUD/USD looks to retain buyer interest at 20-day average
From a technical standpoint, the outlook remains fairly neutral with no clear directions. The Relative Strength Index (RSI) continues to stay above 50 but remains flat. The Moving Average Convergence Divergence (MACD) continues in the negative sphere with a series of red bars. Anticipation builds around buyers retaining the AUD/USD above the 20-day Simple Moving Average (SMA), a key defensive line that could dictate the future momentum of the pair.
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.
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