Australia Dollar under pressure as markets await local inflation data and Fed
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Patricio Martín
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27 Jan @ 08:30 (GMT+0)

Australia Dollar under pressure as markets await local inflation data and Fed

  • AUD/USD slips towards 0.6270 on Monday.
  • Trade tensions between the US and Colombia subside, dampening the Greenback.
  • Fed expected to maintain rates at 4.25%-4.50% on Wednesday.
  • All eyes are on Australian CPI for RBA policy clues.

AUD/USD declined at the start of the week towards 0.6270 as US Dollar (USD) gains evaporated following signs that United States (US) friction with Colombia could be cooling. Meanwhile, the Federal Reserve (Fed) is widely anticipated to keep interest rates unchanged this week, with traders searching for any insight into policymakers’ stance amid ongoing calls from President Donald Trump for immediate cuts.

The Australian Dollar (AUD), however, faces headwinds ahead of the release of domestic inflation data, which will determine the Reserve Bank of Australia’s (RBA) February rate decision.

Daily digest market movers: Aussie loses ground as markets await Fed and Aussie’s CPI

  • The US Dollar initially firmed after President Trump threatened a 25% levy on Colombia for rejecting deportees. The Greenback later fell back as the White House confirmed Colombia’s acquiescence, dousing trade-war fears.
  • Fed policy will be the focus. The US central bank meets on Wednesday and is likely to leave rates within 4.25%-4.50%.
  • Market participants will examine how policymakers react to Trump’s demands for swift interest-rate cuts and assess the potential for future moves.
  • Australian CPI will be pivotal. Fourth-quarter inflation data due Wednesday are forecast at 2.5% year-on-year, down from 2.8%, and a 0.3% quarterly increase following the previous 0.2%.
  • Weak prints could fortify bets that the RBA may begin rolling back its policy tightness as early as the upcoming meeting.

AUD/USD technical outlook: Indecision reigns as traders seek clarity

The AUD/USD retreated to 0.6270 on Monday, experiencing choppy price action between 0.6200 and 0.6330 since last week. Despite opening the week at 0.6315, the pair settled near 0.6270, hinting at a mild bearish tone. The Moving Average Convergence Divergence (MACD) shows flat green bars, indicating some underlying bullish undercurrents, but the Relative Strength Index (RSI) at 55 points downwards, suggesting declining momentum. With key central bank decisions and inflation data on tap, participants are awaiting a clearer narrative before driving any substantial directional moves.

RBA FAQs

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.

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.

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.

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.

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.