Despite slight adjustments in the growth of the USD on Tuesday morning, there's still considerable demand for the greenback. This demand stems from the belief that the Federal Reserve (Fed) is unlikely to drastically reduce interest rates throughout the year.
Concurrently, the Australian dollar has seen a significant uptick following the decision by the Reserve Bank of Australia (RBA) regarding interest rates.
The RBA opted to keep interest rates unchanged on Tuesday, maintaining them at 4.35%, a decision in line with expectations following the February meeting. This marks the twelfth consecutive year with no adjustment to the rate. However, the RBA issued a cautionary note, indicating that further increases in interest rates might be necessary to curb inflation.
Investors are gradually adjusting their expectations regarding the timing of the first interest rate cut by the RBA, shifting the projected date from June to August. Similarly, economists surveyed by Reuters anticipate that the central bank will maintain stable interest rates in the latter part of the year.
Following the RBA's decision, the Australian dollar experienced a 0.44% increase, reaching 0.65115 dollars. This movement signifies a departure from its lowest point in over two months, which was recorded at 0.6469 dollars earlier in the week. Conversely, the New Zealand dollar saw a 0.27% increase, reclaiming the 0.60 dollar level.
Charu Chanana, the head of currency strategy at Saxo Bank, remarked that the RBA's decision to maintain a hawkish stance is logical. This stance aligns with recent resistance observed among major central banks, including the Fed and the European Central Bank (ECB), against expectations of monetary policy easing.
Despite this, Chanana noted that the negative outlook for the Australian dollar remains intact, citing delays in RBA pricing compared to the Fed and broader concerns about the Chinese economy.
Meanwhile, the dollar index, which measures the performance of the US dollar against six major currencies, declined to 104.32 after reaching 104.60 on Monday. This represents the highest level since November 14. The index has shown a 3% increase since the beginning of the year, following a 2% decline in 2023.
Recent data from Monday indicated that the US services sector experienced accelerated growth in January. This growth was accompanied by an increase in new orders and a rebound in employment, suggesting a robust start to the year for the US economy. These positive indicators followed last week's impressive employment report.
Despite this strong economic data from the US, hopes for early and aggressive interest rate cuts by the Fed have been quelled. Both Fed Chairman Jerome Powell and other policymakers have dismissed this possibility.
Traders have responded by reducing the likelihood of a rate cut in March, with the CME FedWatch tool indicating only a 16% chance, down from 69% at the beginning of the year.
Currently, traders are pricing in 115 basis points (bps) of cuts by the Fed this year, compared to approximately 150 bps anticipated at the start of January. This adjustment reflects a more conservative outlook on the pace and extent of future interest rate reductions.
06.02.2024
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