The Australian Dollar faces downward pressure as the US Dollar maintains its position in the face of cautious commentary from Federal Reserve officials.
On Tuesday, the Australian Dollar (AUD) experienced a decline against the US Dollar (USD), largely influenced by the latest data released from the S&P Global Purchasing Managers’ Index (PMI) for Australia. Notably, the AUD/USD exchange rate fell as the Greenback gained ground, a development attributed to the careful remarks from the US Federal Reserve (Fed) officials regarding future monetary policy.
According to the latest PMI figures, Australia’s Composite PMI registered a fall to 52.1 in September, a decrease from the prior reading of 55.5. This drop marks the lowest PMI index value in three months and reflects a slowdown in both the manufacturing and services sectors. Specifically, businesses noted a deceleration in growth due to weak inflows of new business and diminished orders, with manufacturers reporting the fastest decline in goods orders seen in eight months. The Services PMI also indicated a slight contraction, declining to 52 in September from 55.8 in August, while the Manufacturing PMI similarly slipped to 51.6 from 53.0.
On Monday, Michele Bullock, the Governor of the Reserve Bank of Australia (RBA), communicated in parliament that job market conditions have softened slightly, with a noted uptick in unemployment rates. Despite these changes, she emphasized that the labor market remains tight and close to full employment. Bullock indicated that the recently executed rate cuts should bolster household and business spending; however, she underscored the RBA's need to remain vigilant and responsive to evolving market conditions. The RBA Board is committed to closely monitoring economic data and potential risks ahead to inform its policy decisions.
Similarly, the US Dollar Index (DXY) maintained stability, hovering around 97.20 at the time of this report. Market participants are keeping an attentive eye on the preliminary S&P Global PMI readings for the US being released later that day. Additionally, comments from Fed Chair Jerome Powell are of significant interest.
Beth Hammack, President of the Cleveland Fed, expressed on Monday that inflationary pressures are expected to persist in the near term, posing challenges for the Fed as it attempts to balance its dual mandate of controlling inflation while also supporting job growth. On another note, Richmond Fed President Thomas Barkin remarked that tariffs often lead to higher consumer prices, highlighting that businesses are currently more concerned with uncertainties surrounding trade policies than with elevated interest rates.
Further developments included the release of Initial Jobless Claims by the US Department of Labor (DOL), which fell to 231,000 for the week ending September 13. This figure was better than analysts' expectations of 240,000 and also marked a decrease from the previous week’s revised figure of 264,000. Continuing Jobless Claims also saw a decline, reducing by 7,000 to 1.920 million for the week ending September 6.
Last week, the Federal Reserve made the decision to cut the funds rate by 25 basis points (bps) for the first time this year, signaling a potential further easing of 50 bps by the end of the year, an adjustment slightly beyond its June projections. Powell provided insights into the reasoning behind this rate cut, citing emerging signs of weakness in the labor market while highlighting concerns over inflation driven by tariff implications.
In a related context, the People’s Bank of China (PBOC) announced it would maintain its Loan Prime Rates (LPRs) at 3.00% for one year and 3.50% for five years. Moreover, significant developments at the White House revealed that US companies are slated to assume control over TikTok’s algorithm, with American representation in six of the seven board positions overseeing its US operations. White House Press Secretary Karoline Leavitt stated that this agreement could come to fruition in the upcoming days, although no statement has been issued yet by Beijing.
Within the context of market expectations, there is currently only a 20% likelihood of another RBA rate cut in September, but the odds for November stand at 70%. This cautious sentiment is largely due to inflation rates exceeding target levels, causing policymakers to tread carefully.
As of now, the AUD/USD pairing is trading in the vicinity of 0.6590. A daily technical analysis suggests that this pair lingers just below an ascending channel formation, signaling a mild bearish trend. Notably, the 14-day Relative Strength Index (RSI) remains just above the neutral midpoint of 50, indicating that bullish sentiment is still present.
The pair may encounter initial support at the vital 0.6550 level, aligning closely with the 50-day Exponential Moving Average (EMA) at 0.6549. Should there be a breach of this support zone, it could weaken the medium-term price momentum, potentially driving prices toward the three-month low of 0.6414, observed on August 21.
On the upside, the nine-day EMA level at 0.6611 is expected to serve as a significant resistance point, followed by the lower edge of the ascending channel around 0.6630. A rebound back into the channel could invigorate near-term momentum, steering the AUD/USD toward the 11-month peak of 0.6707, which occurred on September 17, and subsequently pushing towards the upper boundary of the ascending channel at approximately 0.6720.
In examining the current Australian Dollar exchange rates against other major currencies, the table below presents today’s percentage changes. Notably, the Australian Dollar performed weakest against the Swiss Franc.
| Currency | USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF |
|-------------|--------|--------|--------|--------|--------|--------|--------|--------|
| USD | 0.06% | -0.05% | 0.03% | 0.07% | 0.18% | 0.25% | -0.09% |
| EUR | -0.06% | 0.03% | -0.02% | 0.08% | 0.20% | 0.25% | -0.09% |
| GBP | 0.05% | -0.03% | 0.02% | 0.04% | 0.16% | 0.21% | -0.13% |
| JPY | -0.03% | 0.02% | -0.02% | 0.03% | 0.18% | 0.21% | -0.04% |
| CAD | -0.07% | -0.08% | -0.04% | -0.03% | 0.12% | 0.18% | -0.16% |
| AUD | -0.18% | -0.20% | -0.16% | -0.18% | -0.12% | 0.06% | -0.21% |
| NZD | -0.25% | -0.25% | -0.21% | -0.21% | -0.18% | -0.06% | -0.34% |
| CHF | 0.09% | 0.09% | 0.13% | 0.04% | 0.16% | 0.21% | 0.34% |
The heat map above illustrates the percentage fluctuations among major currencies on this day of trading. For instance, if you examine the interaction between the Australian Dollar and the US Dollar, you’ll find a negative change in value displayed in the respective box, indicative of an AUD depreciation against the USD.
### Understanding Risk Sentiment in Markets
In the realm of finance, the terms "risk-on" and "risk-off" are frequently employed to describe the varying appetite that investors have for risk during different market conditions. A "risk-on" sentiment signifies that investors are optimistic, encouraging them to invest in higher-risk assets. Conversely, a "risk-off" environment arises when investors become apprehensive, prompting them to opt for safer assets that may promise steadier, albeit more modest, returns.
During periods categorized as "risk-on," we often witness rising stock markets, with the majority of commodities (Gold being a notable exception) also experiencing price increases, reflecting a favorable economic outlook. Currencies from nations that heavily rely on commodity exports tend to appreciate, aligning with heightened investor demand for these tangible resources. This increase in demand is driven by the expectation of stronger economic activity.
On the flip side, in a "risk-off" scenario, bonds, especially major government bonds, see increased value, while Gold shines as a safe haven. Major currencies such as the US Dollar, Japanese Yen, and Swiss Franc typically appreciate during these times. The US Dollar’s status as the world’s reserve currency means it remains a safe asset during turbulent times, while Japanese government bonds see demand due to the predominance of domestic holders who are less likely to sell them, even in crises. Swiss banking practices also offer protection, enhancing the appeal of the Swiss Franc.
In summary, currencies like the Australian Dollar (AUD), Canadian Dollar (CAD), and New Zealand Dollar (NZD), which originate from economies reliant on exports of raw materials, typically perform better in a "risk-on" environment. In contrast, the US Dollar, Japanese Yen, and Swiss Franc generally see gains in "risk-off" periods due to their protective qualities.
As a final note, the information provided herein contains forward-looking projections that involve inherent risks and uncertainties. While the content aims to be informative, it should not be construed as a recommendation to buy or sell assets mentioned. Investors should conduct their own due diligence before making any financial decisions, as market engagement carries the potential for significant risks, including the possibility of total investment loss. The opinions articulated in this piece are those of the author and may not reflect the official stance of FXStreet or its associates.
