The Australian dollar offset gains from the USD recovery

VaselineSeptember 18, 2024

0 3 minutes read

The Australian dollar offset gains from the USD recovery

AUD/USD fell as the US dollar recovered following Powell’s words.
The Fed cut rates by 50 bps to 5%.
Federal policymakers predict lower GDP growth, higher unemployment and lower inflation in the coming years.

AUD/USD hit a high of 0.6800 before falling back to 0.6760 following the Federal Reserve’s (Fed) decision to cut interest rates by 50 basis points to 5%. Fed Chairman Jerome Powell’s cautious words appear to have caused the USD to clear most of the day’s losses.

On the Australian front, the Australian economy faces an uncertain future with mixed signals from various economic indicators. Despite high inflation, the Reserve Bank of Australia (RBA) has maintained a dovish stance, indicating a commitment to combat inflation by raising interest rates. As a result, markets now anticipate only a modest easing of monetary policy in 2024, with a potential rate cut of just 0.25%.

Daily market reasons: Aussie pars gains as markets digest Powell’s words

The Australian dollar pared gains against the US dollar following the Fed’s 50 basis point rate cut.
The Fed cut its 2024 GDP growth projection to 2%, down from 2.1% previously, and raised its unemployment rate forecast for 2024 and 2025 to 4.4%, up from 4.2%.
Inflationary expectations eased, with PCE inflation expected to reach 2.3% by the end of 2024, down from the previous estimate of 2.6%, while core inflation is expected to settle at 2, 6%
The Fed cut interest rates by 50 basis points to a range of 4.75-5.00% in an effort to balance economic conditions.
Fed Chairman Powell said the rate cut was not a signal of a new pace of cuts and that the Fed has been patient and is moving at an appropriate pace.

AUD/USD Technical Outlook: The pair rejected above the 0.6800 resistance

AUD/USD rallied significantly, approaching 0.6800 after the surprise Fed decision. After clearing all the daily gain indicators, they have flattened somewhat, but the overall outlook remains positive. For this to hold, the bulls need to defend the 20-day simple moving average (SMA) at 0.6730.

Fed FAQ

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to ensure price stability and to promote full employment. Its main tool for achieving these objectives is the adjustment of interest rates. When prices rise too quickly and inflation is above the Fed’s 2 percent target, it raises interest rates, raising borrowing costs throughout the economy. This results in a stronger US dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates to encourage borrowing, which hurts the greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. Twelve Fed officials attend the FOMC—the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve rotating one-year terms. .

In extreme situations, the Federal Reserve can resort to a policy called Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy higher quality bonds from financial institutions. QE usually weakens the US dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal of bonds it holds at maturity to buy new bonds. It is usually positive for the value of the US dollar.

VaselineSeptember 18, 2024

0 3 minutes read

Daily market reasons: Aussie pars gains as markets digest Powell’s words

AUD/USD Technical Outlook: The pair rejected above the 0.6800 resistance

Fed FAQ

Vaseline

Related Articles

IMF staff proposes a REDI framework to catalyze CBDC adoption

USD/CHF holds above 0.8400 as traders await Fed Powell’s speech

China is no longer the “undisputed leader” for FDI, says the European Chamber of Commerce in China

USD/CHF tranzacționează cu câștiguri modeste peste mijlocul 0,8600, lipsit de convingere optimistă