Australian Dollar Takes a Pause After Streaky Run

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After a week of significant increases, the Australian dollar is down today. The Australian dollar has decreased by 0.22% against the US dollar in today’s European session, with the current trading rate being 0.6690.

After a weak inflation report, the US dollar sharply fell last week while the Australian dollar gained 3.6%. Headline and core inflation both decelerated in October more than what was expected. This increased investor risk appetite and sent the Australian dollar to its highest since September 22nd.

The greenback wasn’t as strong as possible because of the soft inflation report, raising expectations that the Fed will soon lower rates. After four hikes in a row of 0.75%, the markets are now pricing a more modest increase of just 0.50% at the next December meeting. Although it would be a notable increase, investors have been searching for a justification to put money into stocks, and the decrease in inflation gave them that opportunity.

In Australia, inflation is the most pressing concern. The Reserve Bank of Australia stated that inflation will not reach the target of 2 per cent until 2025 and is expected to peak at 8 per cent in December. There is a strong likelihood that the RBA will raise rates by 0.25% for the third consecutive time at the December meeting. 

Last week, RBA Deputy Governor Michele Bullock said that rates could have risen more steeply to bring inflation down rapidly; however, “scorched earth” policies would’ve led to losing the positive job growth momentum.

“I can’t emphasise enough just how much financial markets have been surprised at how unemployment has come down,” she said.

“The fact that we need less tightening than many think to offset a drop in underlying inflation is a relief.”

Looking forward, it is too soon to tell what will happen with the Australian dollar. It could either continue its run or drop back down again. We will have to see what the economic releases this week, such as data on retail sales and building approvals, will tell us about Australia’s economy. If inflation continues to decline, investors will be less willing to invest in the Australian dollar, and the dollar will drop.

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