Australian Dollar after hawkish RBA, US elections

• AUD/USD climbs as RBA Governor Michelle Bullock emphasizes the need to maintain a restrictive rate stance.
• US presidential election remains the main driver for AUD/USD ahead of Trump-Harris election.
• Trump’s victory expected to be unfavorable for AUD due to his promise to raise tariffs on China.

In Tuesday's session, the AUD/USD rose 0.77% to 0.6638 as the Reserve Bank of Australia (RBA) signaled a hawkish stance on interest rates. The central bank's Governor, Michelle Bullock, stressed the need to maintain a restrictive monetary policy amid persistent inflationary pressures.

The Australian Dollar is also being influenced by the upcoming US presidential election, with a potential victory by Donald Trump viewed as unfavorable for AUD due to his promise to raise tariffs on China. In addition, the pair is expected to react to the release of US inflation data and the Federal Reserve's (Fed) policy meeting this week, as market participants assess their potential impact on the USD.

Daily digest market movers: Australian Dollar rising as RBA favors hawkish guidance

• AUD/USD strengthened as the RBA maintained a hawkish stance, leaving interest rates unchanged at 4.35%.
• RBA Governor Michelle Bullock emphasized the need for a restrictive interest rate stance due to persistent upside risks to inflation.The RBA stated that policy will need to remain restrictive until inflation moves sustainably toward the target range.
• The outlook for AUD/USD is uncertain amid the upcoming US presidential election, with Trump's victory potentially negative for the Australian Dollar due to his proposed tariffs on China.
• Investors will also monitor the Fed's policy meeting this week, with a 25 basis point interest rate cut widely anticipated.

AUD/USD technical outlook: Bulls recover and aim for the 100-day SMA

The AUD/USD pair has been recovering after a recent decline. The Relative Strength Index (RSI) is suggesting that buying pressure is recovering, as its value is at 48, rising sharply in the negative area. The Moving Average Convergence Divergence (MACD) is suggesting that selling pressure is flat, but as it's staying in the red, a change in trend could be seen in the following sessions. The overall outlook suggests a neutral to slight positive sentiment, with the pair likely to trade within a range before breaking out.The pair is striving to hold the psychological level of 0.6600 and reclaim the 200-day Simple Moving Average (SMA) at 0.6630. This move indicates a potential shift in market sentiment, with buyers regaining control after a period of consolidation.

RBA FAQs

What is the Reserve Bank of Australia and how does it influence the Australian Dollar?

The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.

How does inflation data impact the value of the Australian Dollar?

While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.

How does economic data influence the value of the Australian Dollar?

Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.

What is Quantitative Easing (QE) and how does it affect the Australian Dollar?

Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.

What is Quantitative tightening (QT) and how does it affect the Australian Dollar?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.

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