Australian Dollar declines to near 0.7150 as hot US inflation data boost case for Fed rate hike
- AUD/USD softens to near 0.7160 in Monday’s early Asian session.
- US CPI accelerated in August, reinforcing expectations that the Fed will raise interest rates next week.
- Hawkish RBA signals might help limit the Aussie’s losses.
The AUD/USD pair edges lower to around 0.7160 during the early Asian session on Monday. Stronger-than-expected US inflation reports provide some support to the US Dollar (USD) against the Australian Dollar (AUD). All eyes will be on the US Federal Reserve (Fed) interest rate decision on Wednesday.
The US Consumer Price Index (CPI) rose 0.4% MoM in August, putting the 12-month increase at 3.4%, the Bureau of Labor Statistics reported Friday. Both readings were in line with the Dow Jones consensus.
The core CPI, which excludes volatile food and energy prices, increased by 0.3% on a monthly basis, compared to the market consensus of 0.2%, and 2.4% on a yearly basis, down slightly from 2.5% in July.
The CPI inflation data followed strong readings in several components of the Producer Price Index (PPI) released on Thursday, raising the specter of a Fed interest rate hike next week and supporting the Greenback.
Financial markets initially priced in an 86.2% odds of a quarter-point rate hike at the Fed's September meeting, up from 72% before the CPI data, according to CME's FedWatch tool.
A hawkish tone from the Reserve Bank of Australia (RBA) might help limit the Aussie’s losses. RBA Assistant Governor Sarah Hunter said on Tuesday that the central bank may need to raise interest rates again if inflation proves more persistent than expected, keeping alive the prospect of another hike at its September meeting.
Aussie slides as UOB flags growing downside risks in AUD/USD
Strategists at UOB Group note that their medium-term stance on AUD/USD remains intact, even as price action has turned sharply lower. They recall that since last Friday, when spot was at 0.7205, their view was that the Aussie “could edge higher, but any advance is likely to stay within a 0.7160/0.7240 range.” After the pair “edg[ed] higher for several days and reach[ed] a high of 0.7238 two days ago,” UOB highlights that AUD then “plunged and closed 0.83% lower at 0.7157 yesterday.”
The bank stresses that this “rapid increase in downward momentum indicates that AUD could decline toward 0.7120,” marking a shift toward a more bearish near-term bias. However, UOB also cautions that if AUD were to break above “0.7210 (‘strong resistance’ level), it would mean that it is likely to continue to trade in a range,” keeping the broader 0.7160–0.7240 consolidation scenario in play over the next one to three weeks.
Technical Analysis: AUD/USD
In the daily chart, AUD/USD holds above the 100-day moving average (MA) and the lower Bollinger Band, suggesting a constructive near-term tone, while price is testing the area just under the middle Bollinger band. The Relative Strength Index (14) at 54 leans slightly positive, hinting that buyers retain control but without overstretched momentum.
On the topside, immediate resistance emerges at the middle Bollinger band at 0.7170, followed by the upper band near 0.7235, where upside attempts could begin to stall. On the downside, initial support is located at the lower Bollinger band around 0.7100, ahead of the 100-day MA at 0.7080, a break of which would weaken the bullish bias and expose deeper retracements.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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.