Australian Dollar struggles as markets await Fed's guidance

• Aussie drops near 0.6340 as sentiment sours before Fed decision.
• Fed expected to slow the pace of 2025 rate cuts.
• Weak Australian consumer sentiment fuels RBA dovish bets.
• Despite USD softness, AUD struggles amid cautious markets.

The Australian Dollar falls sharply to near 0.6340 amid a cautious market mood ahead of the Federal Reserve’s policy announcement. The Fed is anticipated to hint at fewer interest rate cuts for 2025, weighing on risk appetite. Soft Australian consumer sentiment has bolstered expectations of a dovish Reserve Bank of Australia move in February, keeping the Aussie under pressure despite some recent USD weakness.

Daily digest market movers: Aussie slips as markets eye Fed pivot and soft Australian sentiment

• According to the CME FedWatch tool, traders price in a 25 basis points rate cut on Wednesday, but lean toward a pause in January 2025.
• The US Dollar Index (DXY) rises above 107.00 as risk-off mood prevails; S&P500 futures trade lower, signaling cautious sentiment.
• November’s US Retail Sales growth of 0.7% beat forecasts, but mixed revisions and weaker ex-Cars data tempered USD optimism.
• Industrial Production contracted by 0.1% in November, missing the 0.3% expansion consensus, underscoring uneven US growth.
• US 10-year Treasury yields pull back from 4.43%, last seen near 4.38%, reflecting lingering uncertainty before the Fed’s decision.
• Australian Westpac Consumer Confidence fell 2% in December after a 5.3% rise in November, raising doubts over the domestic outlook.
• Concerns over China’s growth, due to incoming US tariffs, further weigh on the Aussie as Australia is a key Chinese trading partner.

AUD/USD technical outlook: Aussie nears oversold territory as bearish momentum builds

The AUD/USD pair declined by 0.42% to 0.6350 on Tuesday, extending its losing streak. The Relative Strength Index (RSI) hovers around oversold levels and is declining sharply. The Moving Average Convergence Divergence (MACD) histogram prints decreasing red bars, reinforcing the bearish narrative. While the pair struggles to hold ground, indicators flirting with oversold conditions may eventually trigger a corrective rebound. However, traders await the Fed’s guidance and fresh economic data before placing directional bets.

Central banks FAQs

What does a central bank do?

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

What does a central bank do when inflation undershoots or overshoots its projected target?

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

Who decides on monetary policy and interest rates?

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Is there a president or head of a central bank?

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

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