The Australian and New Zealand dollars experienced a sigh of relief as news broke of a deal between US President Joe Biden and congressional Republican Kevin McCarthy to suspend the US debt ceiling. This development removed a major source of uncertainty, boosting market sentiment and bolstering the currencies of the two Pacific nations.
The Australian dollar rises to $0.6528, recovering from a 2% drop the previous week that had brought it to a six-month low of $0.6490. The currency now faces resistance at the 10-day moving average of $0.6595. Similarly, the New Zealand dollar climbed 0.1% to $0.6052, having previously slumped 3.6% to a half-year low of $0.6034. The Kiwi’s resistance level is at the 200-day moving average of $0.6153.
The debt ceiling deal, reached after weeks of negotiations, seeks to avert the potentially destabilizing consequences of default by suspending the $31.4 trillion debt ceiling until 2025. However, the agreement must still navigate the divided Congress to become effective.
Australian Dollar rises after recent decline, while domestic factors and US inflation data remain in focus
In addition to the positive impact of the debt ceiling resolution, the rebound in iron ore and copper prices on Monday has aided the stabilization of the Australian dollar above the 65 cent mark. Nonetheless, concerns about China’s economic recovery, expectations of prolonged higher US interest rates, and soft domestic data continue to exert pressure on the currency.
Looking ahead, market attention turns to US inflation data as the Federal Reserve’s preferred measure, the personal consumption expenditures (PCE) price index, came in stronger than anticipated. Alongside robust US consumer spending, these factors have tilted market expectations towards a quarter-point interest rate hike by the Fed next month, with the possibility of rates remaining unchanged for the rest of the year.
Contrasting the US scenario, the Reserve Bank of Australia is expected to maintain interest rates at their current level next month, barring any negative surprises from the upcoming monthly inflation reading. Economists forecast that consumer inflation likely remained flat at 6.3% for April, adding to a series of lackluster economic indicators in recent weeks.
However, if the inflation and wage pressures exceed expectations on the upside, there exists a risk of another rate hike in the second half of the year. This would bring the cash rate to 4.1%, with futures indicating that rates could remain at this level until year-end.
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As the Australian and New Zealand dollars recover from their recent setbacks, market participants will closely monitor domestic economic data and US inflation figures to gauge the future direction of these currencies. The interplay between global economic factors, monetary policy expectations, and market sentiment will shape their performance in the coming weeks.
The recent gains in the Australian and New Zealand dollars following the US debt ceiling deal provide a temporary respite for the currencies. However, both the Aussie and Kiwi still face a range of challenges and domestic factors that could influence their performance in the near term.
One of the concerns for the Australian dollar is the ongoing economic recovery in China, its largest trading partner. Any signs of a slowdown in the Chinese economy could impact Australia’s exports, particularly commodities such as iron ore and copper, which have a significant impact on the country’s export revenue. Additionally, the tensions between Australia and China on trade issues continue to pose a potential risk to the Aussie’s stability.
Meanwhile, the Reserve Bank of Australia (RBA) is closely monitoring domestic economic data, including the monthly inflation reading. The RBA has maintained a cautious stance on monetary policy, and any surprises in the inflation data could prompt a reassessment of the central bank’s outlook. If inflationary pressures turn out to be stronger than expected, there is a possibility of a rate hike in the second half of the year, potentially boosting the Australian dollar.
Similarly, the New Zealand dollar faces its own challenges. The dovish stance of the Reserve Bank of New Zealand (RBNZ), which recently signaled that it has completed its rate-hiking cycle, has weighed on the Kiwi. Soft domestic data and a cautious approach to monetary policy have dampened investor sentiment towards the currency.
On the global front, market participants will closely watch US inflation data, which could further influence expectations for future interest rate hikes by the Federal Reserve. A stronger-than-expected inflation reading may lead to a more hawkish stance from the Fed, potentially supporting the US dollar against its major counterparts, including the Aussie and Kiwi.
Conclusion
Overall, while the US debt ceiling deal brings temporary relief, the Australian and New Zealand dollars remain exposed to various factors that will shape their performance. Investors will closely monitor economic indicators, central bank policies, global trade dynamics, and risk sentiment to navigate the ever-changing currency landscape in the weeks ahead.
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