The Market Maintains Safe-Haven Demand, The USD Strengthens & the AUD/USD Fluctuates Lower

The Australian dollar fluctuated lower as the market maintained risk aversion on Monday. The recovery of demand for the US dollar put pressure on the Australian dollar/US dollar. The Australian dollar may have limited room to fall due to continued high inflation rates and strong retail sales and service purchasing managers’ indexes (PMI). These factors may prompt the Reserve Bank of Australia to postpone a possible rate cut.

The minutes of the Reserve Bank of Australia’s June meeting showed that policymakers stressed the need to remain vigilant to upside risks to inflation. Policymakers noted that a sharp rise in prices may require a sharp increase in interest rates. Although interest rates remained stable in June, inflation unexpectedly rose to 4.0% in May from 3.6% in the previous value, triggering a warning that the Reserve Bank of Australia may raise the cash rate to 4.6% in September.

The US dollar (USD) may face challenges after data released on Friday showed that US job growth slowed in May. Although the non-farm payrolls (NFP) in June exceeded market expectations, it slowed down compared with the increase in May. In addition, the unemployment rate also rose in June. This may lead traders to speculate that the Federal Reserve (Fed) may cut interest rates sooner rather than later.

The interest rate market’s pricing in the probability of a September rate cut rose to nearly 70.7% from 64.1% a week ago, according to the CME FedWatch tool.

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