The Australian Dollar (AUD) experienced a decline of over 0.73% on Monday, largely due to negative sentiment stemming from a drop in technology stocks, rising tensions in the Middle East, increased energy prices, and a surge in bond yields. The AUD/USD pair is currently at 0.7118, having reached a daily high of 0.7168 earlier.
AUD/USD declines as tech sector struggles, oil concerns, and Fed expectations boost the Dollar
US leaders in the AI sector voiced worries about the rapid developments in their field, suggesting a need for a slowdown. This contributed to a downturn in US equity markets, while the US Dollar gained strength, supported by the US 10-year Treasury yield surpassing 5%, leading to an estimated increase of 0.33% for the US Dollar Index (DXY) at the close of Monday.
The DXY, which measures the value of the Dollar against six other currencies, has risen to 99.46, recovering the 99.00 mark.
Geopolitical events have also influenced the market, notably an attack by Yemen’s Houthis on a Saudi oil pipeline, which might be closed for several weeks, potentially resulting in a daily shortage of about 7 million barrels. This, combined with last week’s US inflation report, has driven up investors’ expectations for inflation and led traders to anticipate a near-certain rate hike by the Federal Reserve.
Money markets are now pricing in a 97.50% likelihood of a 25 basis points rate hike during the Fed meeting on September 15-16.
While the US economic data was sparse on Monday, it is expected to gather momentum on Tuesday with the release of the four-week average for the ADP Employment Change.
In Australia, the AUD is under pressure, largely due to a pessimistic market outlook which has enhanced the attraction of the US Dollar as a safe haven. The ANZ-Roy Morgan Australian Consumer Confidence report is due, and some Chinese economic indicators, especially Retail Sales, may impact the AUD/USD given Australia’s significant trade ties with China.
AUD/USD Price Forecast: Technical perspective
On the daily chart, AUD/USD is trading at 0.7118, indicating a slightly bullish short-term outlook as it remains above the simple moving average at 0.7070, alongside a series of ascending trend-line supports between approximately 0.7028 and 0.6902. The Relative Strength Index (14) has dipped toward 46, suggesting a reduction in upward momentum but not signaling an outright bearish trend just yet while prices are supported at these fundamental levels.
Looking upwards, initial resistance is noted around the horizontal level of 0.7198, with the upward trend line around 0.7364 acting as the next potential barrier if bullish momentum continues. Conversely, if prices fall below the nearby support area created by the simple moving averages at 0.7070 and the rising trend line at 0.7028, deeper support levels near 0.6902 may be tested. A sustained breach below this could point to a more significant structural drop towards the earlier trend-line break region around 0.6381.
Australian Dollar FAQs
The Australian Dollar (AUD) is significantly influenced by interest rates set by the Reserve Bank of Australia (RBA). Being a resource-rich nation, the price of its major export, Iron Ore, also plays a crucial role. Furthermore, the state of China’s economy, Australia’s largest trading partner, along with domestic inflation, growth rates, and trade balances affect the AUD. Overall market sentiment—whether investors are inclined towards riskier assets or are seeking safety—matters too, with risk-on conditions being favorable for the AUD.
The RBA impacts the AUD by establishing interest rates that govern lending between Australian banks, which in turn affects rates throughout the economy. The primary objective of the RBA is to maintain a stable inflation rate of 2-3% by adjusting these rates. Higher interest rates compared to other major central banks usually strengthen the AUD, while lower rates can weaken it. The RBA also employs quantitative easing and tightening to influence credit conditions, with the former typically being negative for the AUD and the latter positive.
China ranks as Australia’s top trading partner, thus the state of the Chinese economy significantly affects the value of the Australian Dollar (AUD). When China’s economy is flourishing, it demands more materials and services from Australia, driving up AUD demand and value. Conversely, a slowdown in China’s economy results in reduced demand for Australian exports. As such, market reactions to Chinese economic data often directly impact the AUD.
Iron Ore is Australia’s foremost export, reportedly worth $118 billion annually as of 2021, primarily to China. Consequently, fluctuations in Iron Ore prices heavily influence the AUD. A rise in Iron Ore prices usually increases AUD demand, thereby raising its value, whereas falling prices tend to have the opposite effect. Moreover, heightened prices of Iron Ore can lead to a favorable Trade Balance for Australia, further bolstering the AUD.
The Trade Balance, reflecting the difference between a nation’s export earnings and import expenditures, also affects the AUD’s value. A strong export market leads to increased demand for the currency, enhancing its value, while a negative Trade Balance can have the reverse effect.
