- AUD/JPY depreciates on risk-off sentiment amid rising geopolitical tensions.
- Israel’s security cabinet decided to take decisive action in response to the recent Iranian attack.
- The Japanese Yen struggles as Prime Minister Ishiba expressed that the current environment does not require further interest rate increases.
AUD/JPY trims its intraday gains, holding some gains around 100.50 during European hours on Thursday. The risk-sensitive Australian Dollar (AUD) depreciates as rising geopolitical tensions have dampened risk appetite and undermined the AUD/JPY cross.
The Israel Broadcasting Authority (IBA) reported that Israel’s security cabinet has resolved to take decisive action in response to the recent Iranian attack. On Tuesday night, Iran launched more than 200 ballistic missiles and drone strikes aimed at Israel.
However, the downside risk to AUD may be limited due to the hawkish outlook around the Reserve Bank of Australia (RBA). Data released earlier this week showed stronger-than-expected retail sales growth in August, reducing the likelihood of an early rate cut by the RBA.
On Thursday, Australia’s trade balance for August stood at 5.644 million month-on-month, beating market expectations of 5.5 billion and slightly higher than July’s surplus of 5.636 million. However, both exports and imports decreased by 0.2% month-on-month in August. Markets have almost completely priced in the possibility of a rate cut in November.
The AUD/JPY cross received support as the Japanese Yen (JPY) faced challenges following direct comments on monetary policy from new Prime Minister (PM) Shigeru Ishiba, who met with Bank of Japan (BoJ) Governor Kazuo Ueda , on Wednesday.
Japan’s Prime Minister Ishiba stated, “I don’t think we are in an environment that requires us to raise interest rates further,” according to Reuters. In the previous session, the Japanese Yen fell almost 2% against the US Dollar (USD), marking its biggest drop since February last year.
Interest rates FAQs
Financial institutions charge interest rates on loans from borrowers and pay them as interest to savers and depositors. They are influenced by basic interest rates, which are set by central banks based on the evolution of the economy. Typically, central banks are mandated to ensure price stability, which in most cases means targeting an underlying inflation rate of around 2%.
If inflation falls below the target, the central bank can cut base interest rates, in order to stimulate credit and boost the economy. If inflation rises substantially above 2%, the central bank typically raises core lending rates to try to reduce inflation.
In general, higher interest rates help strengthen a country’s currency by making it a more attractive place for global investors to park their money.
Higher interest rates influence the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or depositing cash in the bank.
If interest rates are high, the price of the US Dollar (USD) usually rises and, since Gold is priced in dollars, the price of Gold falls.
The federal funds rate is the overnight rate at which U.S. banks lend to each other. It is the official interest rate that the Federal Reserve usually sets at its FOMC meetings. It is set in a range, for example 4.75%-5.00%, although the upper limit (in this case 5.00%) is the figure quoted.
Market expectations about the Federal Reserve funds rate are tracked by the CME’s FedWatch tool, which determines the behavior of many financial markets in anticipation of future Federal Reserve monetary policy decisions.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
