Australian Dollar Outlook: US Dollar Remains in the Driver Seat for AUD/USD

The Australian dollar is closely tied to the global economy and equity markets. It depreciates when global equity markets decline and appreciates when they rise. Commodities also play a role in its strength. When commodity prices increase, they can entice exporters to increase their output. If commodities remain low, they can also hurt Australian dollar exchange rates.

Traditionally, the US dollar has been considered the safe haven of choice for investors who are looking for reduced risk exposure. However, in recent months, the Federal Reserve has signaled an aggressive monetary policy and increased its target for benchmark funds by 0.25% to 0.50%. This has helped the dollar gain against rival currencies.

However, the Australian dollar has also suffered from a number of macroeconomic headwinds. These include the ongoing “trade war” and financial instability in emerging markets. In addition, the Australian economy has improved at a slower pace than expected. Hence, the Reserve Bank of Australia has stepped back on its interest rate hikes.

During the past year, the Australian Dollar has lost nearly 8 percent of its value against the US dollar. In fact, the dollar has lost about 6% of its value in the first three months of the year. While this was a slight improvement over the previous month, it’s still a steep drop. The pair has declined almost nine percent from its March high.

Despite its recent decline, the Aussie is still expected to remain relatively stable over the next few months. The rate will likely stabilise in the second quarter and may even rise until the start of Q2. There are a number of factors that influence AUD/USD forecasts. Some of these include monetary policy, economic outlooks, and inflation in both nations.

Although inflation has fallen in the U.S., it remains above the Federal Reserve’s goal of 2%, which could be the start of a long-term slowdown. As such, it’s unlikely the Fed will raise rates too soon. Nevertheless, if it does, the rate may eventually reach a nine-year high.

Inflation is one of the factors that have weighed on the Aussie in recent weeks. Australia’s consumer price index rose to a 7.3% annual rate in the September quarter, while the United States’ CPI soared to a seven-year high of 7.5%. Considering this, the Fed’s expectations for the yearly rate of inflation have decreased significantly. Therefore, the likelihood of the Fed raising rates to 4.25% in 2024, as projected by the IMF, has diminished.

Another factor that has weighed on the Australian dollar is the ongoing trade tensions with China. China is Australia’s biggest trading partner and accounts for a large portion of its imports. In addition, China is a key source of demand for Australian commodities. Because of the ongoing trade tensions, China has imposed restrictions on some Australian coal. A further blow to the Aussie was the news that China recently announced a 19-point stimulus plan.

On the economic front, the Fed is expected to announce its next target for cash rates on Friday. The Federal Open Market Committee will decide whether to raise or lower the target, which could influence AUD/USD forecasts.