On Friday, the Australian Dollar (AUD) felt the weight of this bearishness. It broke the key support area of 0.6050 and moved into the USD. This continues the downtrend to a 5-year low for the AUD/USD pair. Global markets are pricing in increasing likelihood of interest rate cuts from the Reserve Bank of Australia (RBA). In particular, analysts are closely monitoring several economic indicators and external factors that may affect the currency’s trajectory.
During the American trading day the AUD/USD pair dropped sharply, showcasing extreme downside AUD/USD bearish momentum. The Relative Strength Index (RSI) is indicating the EUR/USD has moved into oversold territory. At the same time, the Moving Average Convergence Divergence (MACD) is printing a new bearish crossover. Her recent performance has many questioning its stability, especially as it breaks multi-year key support levels.
Factors Influencing the Australian Dollar
There are many reasons for the Australian Dollar’s up and down movements, but the most important factor is interest rates decided by the RBA. The RBA’s primary purpose, as set out in their legislation, is to control inflation, particularly keeping consumer prices stable and within a target of 2% to 3%. So as the RBA strives to chase this target, the central bank has deployed a number of monetary policy armaments to include quantitative easing and tightening. But typically, quantitative easing will make the AUD weaker while the opposite will strengthen the currency.
The health of Australia’s economy plays a large role on the rate of growth. This, of course, has a huge impact on what the AUD is worth. As economic growth slows or accelerates, the RBA may adjust interest rates accordingly to either stimulate or cool down economic activity. In general, a positive net trade balance strengthens the AUD, while a negative trade balance results in AUD depreciation.
One of the most important factors impacting the Australian Dollar is its biggest trading partner—China. Given the close link between economic conditions in China and Australian exports, especially in commodities (e.g. iron ore), these developments are of immediate consequence here. Iron ore price is by far the most important driver of AUD. That’s hardly surprising when you consider that iron ore is Australia’s second largest export. As a result, cyclical moves in Australian Dollar iron ore prices can greatly influence the level of the Aussie Dollar itself.
The Impact of Global Economic Conditions
Global markets have been very volatile recently, increasing fears about what awaits the Aussie Dollar. Tensions have already receded in light of a previous storm thanks to a fresh round of U.S. tariffs. Strategists are counting on the RBA to respond with a lineup of hefty rate cuts this year. Consequentially, such measures could add to AUD weakness, particularly if these efforts were to be accompanied by deteriorating trade conditions.
Moreover, the impact of external economic adversities can amplify price volatility in the AUD/USD currency pair. If the rest of the world suddenly stops buying Australian exports due to recessions abroad, Australia is going to have a very hard landing with a terrible trade shock. This would only increase downward pressure on the currency. A boost in demand would tend to drive up the AUD, as new exports push the currency upward.
Market sentiment continues to be cautious as traders look for possible scenarios for both the home and international economies. The cumulative effects of rising conflicts in global trade and their potential to derail worldwide economic expansion are key factors weighing on investor minds. As these dynamics develop, they will increasingly affect market sentiment toward the Australian Dollar and its outlook.
Outlook for the Australian Dollar
It’s a choppy environment that makes for a dangerous minefield for the Australian Dollar. Market participants are keenly on the lookout for dovish policy shifts from the RBA. Those changes have a potential to make this a landmark movement as the market remains near all-time lows. Per analysts, a sharp increase in inflation would lead to more hawkish monetary policy moves. Further, they warn that adverse changes in trade balances can produce the reverse.
Investors will be watching closely for updates on inflation figures and trade balances, as these indicators provide insight into economic health and RBA policy responses.