A weaker US dollar and a beneficial interest rate gap are lifting the Australian dollar towards its strongest levels in months, with US inflation data and the Jackson Hole symposium set to determine whether the rally holds.
The Australian dollar has climbed back towards US$0.70 after a strong recovery through July, as a broadly softer US dollar and expectations of a persistent rate advantage over the United States drive renewed demand.
The move comes as global currency markets navigate a volatile mix of Middle East tensions, a new US Federal Reserve chair, and before central bankers gather in Jackson Hole for their annual economic policy symposium later this month.
"The Australian dollar has done well to claw its way back towards 70 US cents, and it's largely a story about what the US dollar is doing rather than what we're doing at home," said OFX Director Luke Czirok. "If US data continues to disappoint and the Fed stays cautious under its new chair, we could see the Aussie dollar test the US 0.71-0.72 cent range.”
The Australian dollar recovered through July to sit just below US$0.70, supported by a beneficial interest rate gap, though further gains may need fresh US dollar weakness. With the Reserve Bank of Australia holding rates this month, markets will continue to watch inflation data, US employment figures, and developments in China given Australia's commodity trade exposure. Stubborn Australian inflation and weaker US data could push the Aussie dollar towards 0.71-0.72, while stronger US figures could send it lower towards the high 0.60s.
The US dollar itself eased in July as softer inflation data offset support from higher oil prices tied to the US-Iran conflict. The US Dollar Index fell around 1.4% over the month, with markets now adjusting to new US Federal Reserve Chair Kevin Warsh, whose more data-led approach has added volatility. A surprise fall in US payrolls last month has raised questions over how long the Fed can hold rates higher, leaving inflation data, employment figures and the Jackson Hole symposium as the key events to watch in August.
Sterling has rallied to around US$1.35 on the back of the softer US dollar, but uncertainty over the UK's fiscal position ahead of the UK Autumn Budget could cap further gains. The pound found support after the Bank of England's July interest rate decision saw three policymakers vote for a rate rise, even as the majority opted to hold. With no further Bank of England decision until mid-September, inflation data and Middle East developments are likely to remain the pound's key drivers for the rest of August.
The euro has climbed above US$1.15 on the weaker US dollar, with an expected European Central Bank rate rise in September offering further support through a quiet August. Eurozone inflation ticked up to 2.9% year-on-year in July and could edge higher still, driven largely by energy prices linked to the US-Iran conflict, though data flow is otherwise thin in August as much of Europe breaks for summer.
Also on watch this month: the New Zealand dollar has recovered towards US$0.59 on an improving risk appetite and a firmer rate outlook, while the yen has pulled back from four-decade lows following a coordinated intervention from the United States and Japan. The Bank of Japan has also signalled it may continue to deliver more rate rises. The Canadian dollar has firmed on strong jobs data and higher oil prices although US trade tensions could limit further gains. The Singapore and Hong Kong dollars remain well supported by resilient regional growth and technology export demand.
Note to editors:
Expected trading ranges for August, according to OFX:
AUD/USD: 0.6900–0.7200
GBP/USD: 1.3270–1.3655
EUR/USD: 1.1440–1.1700
NZD/USD: 0.5750–0.6000
USD/JPY: 152.00–162.00
CAD/USD: 0.7100–0.7250
USD/SGD: 1.2700–1.2900
USD/HKD: 7.8350–7.8480
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