AUD/USD falls as US Dollar bulls return following NFP data
- The US Dollar firms on easing US-China trade tensions and a better-than-expected NFP report.
- Nonfarm Payrolls show that 139,000 jobs were added to the US economy in May, above the 130,000 estimate.
- AUD/USD falls after a temporary retest of psychological resistance, which remains intact at 0.6500
The Australian Dollar (AUD) is weakening against the US Dollar (USD) following Friday’s Nonfarm Payrolls (NFP) pushed back expectations of a near-term interest rate cut from the Federal Reserve (Fed).
At the time of writing, AUD/USD is trading below 0.6500, a psychological level that continues to provide a firm barrier of resistance for price action.
USD recovers after better-than-expected NFP data eases pressure on the Fed
After a series of US employment data releases warned of a softening in the US labour market, the May NFP report provided some reprieve to investors and policymakers.
The report showed that 139,000 jobs were added to the US economy last month, above analyst expectations of 130,000. The Unemployment Rate remained unchanged at 4.2%, offering relief to the Federal Reserve, which has continued to reiterate a data-dependent stance on monetary policy.
Before Friday’s employment data release, the CME FedWatch Tool showed that the probability of a rate cut in July had risen above 30%. However, following the release, expectations for a rate cut in July decreased to 16.% %, reinforcing a potential rate cut in September.
For the AUD/USD pair, interest rate differentials and monetary policy divergence continue to be key drivers of price action. While the Reserve Bank of Australia (RBA) maintains a cautious tone regarding further rate moves, the Fed’s continued hawkishness may keep the US Dollar supported in the near term.
Meanwhile, easing US-China tensions, following a phone call between US President Donald Trump and Chinese President Xi Jinping on Thursday, has improved sentiment. However, tariff uncertainty and ongoing trade tensions involving other major partners like India, Canada, and Mexico could still heighten market volatility.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.