Australian Dollar edges higher as investors brace for US PPI data

• The Australian Dollar trades in positive territory for the second consecutive day in Friday’s Asian session. 
• Reduced bets of deeper Fed rate cuts support the USD and weigh on the pair. 
• Investors brace for the US PPI data, which is due on Friday. 

The Australian Dollar (AUD) gains ground on Friday. Nonetheless, the lower odds of aggressive interest rate cuts from the US Federal Reserve (Fed) after the hotter-than-expected inflation data might lift the US Dollar (USD) and cap the upside for the pair. 

In the absence of top-tier economic data releases from the Australia on Friday, the USD price dynamic will be the main driver for the AUD/USD. Investors will monitor the release of US Producer Price Index (PPI), which is due on Friday. The headline PPI is expected to show an increase of 1.6% YoY in September, while the core PPI is estimated to see a rise of 2.7% YoY during the same period. If the reports shows softer than expected outcome, this could weigh on the USD and acts as a tailwind for AUD/USD. Additionally, the preliminary of the Michigan Consumer Sentiment Index will be released later in the day.

Daily Digest Market Movers: Australian Dollar extends its recovery ahead of another US inflation data

• RBA Minutes from the September meeting showed board members overlooked the warning that there would be no rate cuts in the near future. The Australian central bank wants to keep its options open, watching whether the economy starts to pick up in the second half of the year. 
• The US Consumer Price Index (CPI) rose 2.4% YoY in September, compared to 2.5% in August, above the consensus of 2.3%, the US Department of Labor Statistics showed Thursday. The core CPI, excluding food and energy, climbed 3.3% YoY in September, above forecast and the previous reading of 3.2%. 
• The US Initial Jobless Claims for the week ending October 4 rose to 258K, up from the previous week's 225K. The figure was above the initial consensus of 230K. 
• New York Fed President John Williams said on Thursday that he expects more rate cuts lie ahead as inflation pressures continue to moderate and the economy remains solid.
• Chicago Fed President Austan Goolsbee noted he sees a series of rate reductions over the next year to year and a half, noting that inflation is now near the Fed's 2% target and the economy is about at full employment.
• Atlanta Fed President Raphael Bostic is open to the idea of skipping a rate cut in November if economic data still hasn't aligned with the Fed's target figures in time. 

Technical Analysis: Australian Dollar maintains a positive outlook in the longer term

The Australian Dollar trades stronger on the day. According to the daily chart, the AUD/USD pair keeps the bullish vibe as the price is well-supported above the lower limit of the ascending trend channel and the key 100-day Exponential Moving Average (EMA). However, the further downside cannot be ruled out as the 14-day Relative Strength Index (RSI) is located below the midline near 44.70. 

The first upside barrier emerges near the high of September 6 at 0.6767. Extended gains could pave the way to 0.6823, the high of August 29. Any follow-through buying above the mentioned level could see a rally to 0.6942, the high of September 30.

On the flip side, the key support level is seen at 0.6700, representing the lower limit of the trend channel, the 100-day EMA, and the psychological level. A breach of this level could expose 0.6622, the low of September 11. 

Interest rates FAQs

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

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