AUD/USD retreats from psychological resistance as the Fed remains in the spotlight
- AUD/USD slips to Fibonacci support as the US Dollar recovers.
- The US labour market remains in focus, with Wednesday’s ADP numbers expected to provide insight into the health of the US private sector.
- Psychological resistance firms at 0.6500 as AUD/USD remains vulnerable to the key psychological level that is proving difficult to break.
The Australian Dollar (AUD) is erasing some of its gains against the US Dollar (USD) on Tuesday, after experiencing a positive surge in bullish momentum on Monday.
After gaining 1% in the previous session, the AUD/USD price pair's failure to reclaim the 0.6500 psychological level has enabled bears to drive it back toward a critical level of Fibonacci support near 0.6464.
AUD/USD daily chart
This level corresponds to the 61.8% Fibonacci level of the March 2020 to February 2021 move, which has provided a critical level of support and resistance for historical moves.
AUD/USD continues to monitor the US labour market in search of clues on the Fed’s next move
As broader economic and geopolitical risks continue to drive demand for the US Dollar (USD) and its major counterparts, such as the Australian Dollar, the economic calendar remains key for near-term price action.
The main focus for a large portion of the year has been on the monetary policy divergence between global central banks. For the Reserve Bank of Australia, the release of the RBA Meeting Minutes on Tuesday reiterated the central bank’s commitment to monitoring trade developments and broader risks before committing to keeping interest rates on hold in upcoming meetings.
While the cautious tone of the RBA and the hawkish tone reflected by the Federal Reserve (Fed) have provided a headwind for AUD/USD bulls, interest rates have been largely priced in.
Instead, focus remains on how the US labour market is performing under current circumstances, which could alter the near-term expectations for the Fed. With Tuesday's JOLTS data showing that the number of job openings in the United States (US) rose above analyst forecasts in April, Wednesday’s ADP numbers serve as an additional catalyst for the US Dollar.
These figures, scheduled for 12:15 GMT, provide insight into the health of the US private sector, which is expected to show an increase of 115,000 jobs added in April. The release comes two days before the US Nonfarm Payrolls (NFP) report scheduled for Friday, which serves as a key barometer for the US labour market and interest rate expectations.
At the time of writing, the CME FedWatch Tool indicates a 54.4% probability of the Fed cutting interest rates in September. The Fed is expected to leave interest rates unchanged within the 4.25% to 4.50% range in June and July.
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.