Markets traded cautiously overall on the outset of the Christmas holiday week, with a slight step back in investor risk appetite. Market volumes are contracting ahead of the midweek shutdown, crimping trading hours and money market exposure across the board. RBA Meeting Minutes and Japanese Tokyo CPI inflation are the key data highlights this week.
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Here’s what you need to know heading into Tuesday, December 24:
The US Dollar Index (DXY) rose slightly on Monday, continuing to battle the 108.00 handle as investor confidence took a step back to kick off the holiday trading week. The DXY is still holding onto territory near recent highs, with the Greenback index closing in the green for all but three of the last 11 trading sessions. Monday’s gain of around one quarter of one percent leaves bids on the high end of last week’s late pullback, but price action is still capped below that Friday’s peak of 108.50.
EUR/USD turned lower once more on Monday, getting rejected from the 1.0450 level as markets struggle to find reasons to bid up the Fiber. Last week’s plunge on the back of the Federal Reserve’s (Fed) revised Summary of Economic Projections (SEP), or “dot plot” of interest rate expectations, showed that the Fed itself expects to deliver far fewer rate cuts in 2025 than markets initially expected. The Euro is getting pinned into the low end, and a lack of meaningful European data or appearances from European Central Bank (ECB) policymakers will keep EUR/USD action reactionary to US market themes.
GBP/USD continues to grind out chart paper near 1.2550. The UK’s Gross Domestic Product (GDP) growth in the third quarter came in slightly below expectations, falling away from the second quarter’s already lackluster print. UK Q3 GDP printed at a flat 0.0% QoQ, below the expected hold at 0.1%, and the annualized figure also ticked down to 0.9% from 1.0%.
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AUD/USD is trading near two-year-plus lows near 0.6250. The Reserve Bank of Australia (RBA) will be publishing its latest Meeting Minutes early Tuesday, and Aussie traders are hoping that the only meaningful Aussie data this week will bring further hints of a near-term rate cut. Wiggle room in nuance of the RBA’s previous statement appeared to leave the door open for a near-term rate cut, however it’s getting difficult to ignore the fact that the overly-cautious RBA has kept interest rates on hold for nine straight months.
USD/JPY is also holding steady on the high side, testing territory just north of 157.00. Yen traders will be waiting for a late-week showing of Japanese Tokyo Consumer Price Index (CPI) inflation, which is expected to accelerate again to 2.5% YoY, above the previous period’s 2.2%.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
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Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
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