During the second half of the Asian trading session on Monday, the Australian dollar (AUD) skyrocketed versus the US dollar (USD). It climbed to a multi-day high, demonstrating serious bullish momentum. It’s the weaker USD that’s helping to propel this upward movement. At the same time, speculation about any future Federal Reserve interest rate cuts is booming too.
During Thursday’s Asian trading hours, the AUD/USD had extended its bullish trend, with the USD drawing new sellers. With US inflation indicators starting to show signs of subsiding, hopes are high. This easing by the Federal Reserve further paves the way for interest rate cuts from the central bank in the months ahead. The joint effect of these factors has added to the Australian dollar’s relative strength.
Indeed, analysts argue that while the AUD has jumped on the back of a weaker USD, AUD positive external factors will increasingly turn negative. The softer risk tone in the market attributed to continued US fiscal fears are weighing as well. Renewed trade tension between the US and China amid several geopolitical risk factors may pose some severe headwinds for the AUD/USD pair. Because of these concerns, investors are understandably nervous. This caution is contributing to their newfound unwillingness to touch riskier assets such as the AUD.
The Reserve Bank of Australia (RBA) has remained dovish. This position creates strong headwinds or tailwinds for the direction of the AUD/USD exchange rate. The bank’s actions to date signify a serious commitment to advancing inclusive economic growth. This response could limit the upside for the Australian dollar as it navigates a rocky economic road.
“AUD/USD builds on its steady Asian session move up amid a weaker USD.” – FXStreet
Economic agents have a laser focus on the rapidly evolving economic environment. They stay a panda’s paw opened in case of any policy changes from both the RBA and the Federal Reserve. The interaction between these three central banks’ policies will remain a key driver of currency flows over the next several weeks.