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Understanding Recent Developments in the Australian Dollar and Foreign Exchange Markets

In recent weeks, the Australian Dollar (AUD) has experienced fluctuations within a well-defined range that began in March 2023. Notably, after hitting a peak at 0.6885 against the US Dollar (USD) on July 14th, the AUD/USD exchange rate has encountered 5 out of 6 consecutive declining days, ultimately closing at 0.6729 last week.

An important indicator is that the AUD has now fallen below its 200-day moving average, signalling a potential shift in its trajectory. As market participants eagerly await the Federal Open Market Committee (FOMC) meeting scheduled for this week, there is strong anticipation of a 25-basis point interest rate hike.

In fact, the markets have already priced in a 96% probability of this move. It's essential to understand that any outcome below this anticipated hike or no change at all could lead to a considerable sell-off in the USD, potentially resulting in a pushback towards higher AUD/USD levels around 0.68c.

For those with a limited understanding of foreign exchange markets, it's worth noting that market participants will be closely monitoring the FOMC meeting for insights into potential rate hikes beyond July. Recent progress in core inflation has led to discussions of a possible disinflationary period, suggesting that this month could see a peak in interest rates.

In addition to the FOMC meeting, the second revision to Q2 GDP data will be released. Expectations are that this revision will show a notable decrease from the initial estimate of 2%, with projections indicating a figure of 1.6%. Such economic data releases can have a significant impact on currency valuations and market sentiment.

Later in the week, core Consumer Price Index (CPI) data will be published, which could further reinforce the notion of a disinflationary trend that has emerged since the last core CPI print on July 12th. Should this data indicate a decline, it might once again put the USD under pressure, depending on the tone set by the FOMC during their meeting.

As always, it's essential to bear in mind that foreign exchange markets can be influenced by numerous factors, including economic indicators, geopolitical events, and central bank decisions.

This information is provided solely for educational purposes, please reach out to me if you would like to speak about your specific situation.

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