The AUD/USD currency pair has encountered selling pressure after it experienced a less-assured pullback approaching the 0.6611 level during the Tokyo session. This drawdown has led the Australian currency, often referred to as the Aussie, to resume its downward trajectory in the current market conditions.
Following a somewhat tepid response, the AUD/USD pair traded lower in the wake of the Reserve Bank of Australia’s (RBA) decision to maintain interest rates at 0.10% and provide extended bond purchases while maintaining its three-year yield target at 0.10% from April 2023. The central bank refrained from making any modifications to its monetary policy under Governor Philip Lowe’s leadership, who himself recently remarked that negative interest rates are “extraordinarily unlikely” in Australia.
The RBA’s decision to hold interest rates steady appears to have been motivated primarily by concerns about inflation and the Australian labor market. The central bank has long viewed progress in the domestic job market as a prerequisite for higher interest rates. The latest figures highlight that the unemployment rate in Australia currently stands at around 4.2%; however, policymakers are anticipating this figure to improve further to reach 3.75% by the end of 2022.
Notably, the RBA has also been keeping a close eye on inflation, which continues to exhibit moderate growth. In the latest round of statistics, the Australian Consumer Price Index (CPI) increased by 0.8% in the last quarter of 2021, supported primarily by higher energy prices. Despite this increase, the central bank insists that inflation remains subdued and is expected to continue on this course over the foreseeable future. The RBA’s assessment aligns with recently published minutes of its monetary policy meetings, which suggest that policymakers are increasingly concerned about the risks posed by persistently low inflation, particularly if it restricts the ability of the monetary authority to achieve its inflation target of 2-3%.
In spite of the subdued inflation currently observed in the Australian economy, it is critical to note that global trends could potentially exert upward pressure on inflation levels. For instance, the recent surge in COVID-19 cases, such as the Omicron variant, has driven a significant increase in demand for medical services and hospitalization resources, thereby contributing to higher overall healthcare costs. Additionally, supply chain disruptions have adversely affected the availability and cost of various essential goods, which may also boost inflation rates.
Amid such economic uncertainties, the Australian dollar has displayed considerable resilience in the face of global headwinds, particularly in comparison to other major currencies. The steady approach adopted by the RBA appears to be partly responsible for this, with the central bank opting for pragmatism over a more aggressive policy stance. This cautious approach, however, has not precluded the currency pair from encountering selling pressure in response to external factors, as evidenced by the aforementioned weak pullback near 0.6611 in the Tokyo session.
In the foreign exchange market, the direction of the AUD/USD pair largely depends on the overall outlook for the US dollar. Recently, the greenback has been strengthening due to mounting concerns over the economic impact of the ongoing pandemic. Such considerations are likely to persist until more definitive measures to stem the spread of the virus are implemented or if indications emerge that the global economic recovery remains on track.
Investor sentiment, as well as technical and fundamental data, will continue to shape the trajectory of the AUD/USD pair. On the technical front, support has formed around the 0.6611 level, with further support potentially emerging at 0.6580 and 0.6550. On the other hand, resistance is anticipated at 0.6630, which may then extend to the 0.6650 and 0.6680 levels.
As the market grapples with the multiple challenges posed by COVID-19, its implications for the Australian dollar’s performance will undoubtedly continue to evolve. However, the RBA’s measured approach to monetary policy and ongoing commitment to attaining stable inflation targets promises to help stabilize the economy during these turbulent times, even as the AUD/USD pair currently faces selling pressure.
