Australian Dollar recovers some lost ground ahead of US CPI data

• The Australian Dollar trades firmer in Thursday’s early European session. 
• The firmer USD and a lack of further stimulus measures from China might cap the pair’s upside. 
• The US CPI inflation data will be in the spotlight on Thursday.

The Australian Dollar (AUD) trades in positive territory, snapping the five-day losing streak on Thursday. However, the stronger US Dollar (USD) amid rising speculation of a 25 basis points (bps) rate cut by the Federal Reserve (Fed) in November might undermine the Aussie in the near term. Furthermore, Beijing's attempt to stimulate the world’s second-largest economy disappointed investors as China’s top economic planning authority failed to announce additional measures to improve flagging growth. It’s worth noting that China is a major trading partner to Australia, and concerns about China's sluggish economy tend to have a negative impact on the AUD value.

Investors will closely monitor the key US Consumer Price Index (CPI) inflation data, which is due later on Thursday. The headline US CPI is expected to show an increase of 2.3% YoY in September, while the core CPI inflation is estimated to show a rise of 3.2% YoY in the same report period. However, in case the report shows a softer-than-expected outcome, this could open the door for a jumbo Fed rate cut, which might weigh on the USD and cap the downside for AUD/USD. 

Daily Digest Market Movers: Australian Dollar gains traction ahead of US CPI 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. 
• “This leaves the door open to a shift to neutral by the end of this year and then easing in early 2025. We continue to expect the first cash rate cut in February 2025,” noted ANZ analysts. 
• The World Bank forecasted that China’s growth rate will slow to 4.3% in 2025, down from a projected 4.8% this year, in an economic update on Tuesday.
• San Francisco Fed President Mary Daly said on Wednesday one or two more rate cuts this year are likely if the economy evolves as she expects, adding that she is now "quite confident" inflation is headed toward the Fed's 2% target.
• Boston Fed President Susan Collins said on Wednesday that with inflation trends growing weaker, it is very probable that the Fed can deliver more interest rate reductions. 
• The markets have priced in nearly 80% odds of 25 basis points (bps) Fed rate cuts in November, up from 31.1% last week, according to the CME FedWatch Tool. 

Technical Analysis: Australian Dollar remains vulnerable near the key support level in the longer term

The Australian Dollar trades stronger on the day. Technically, the bullish outlook of the AUD/USD pair looks vulnerable as the pair hovers around the lower limit of the ascending trend channel and the key 100-day Exponential Moving Average (EMA) on the daily chart. If AUD/USD crosses below the mentioned levels, this could resume its downside. The downward momentum is reinforced by the 14-day Relative Strength Index (RSI) which is located below the midline near 41.20.

The crucial support level for AUD/USD emerges 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 pave the way to 0.6622, the low of September 11. 

On the other hand, the high of September 6 at 0.6767 acts as an immediate resistance level of the pair. Further north, the next upside barrier is seen at 0.6823, the high of August 29, followed by 0.6942, the high of September 30.

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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