Aussie jumps as PBOC holds lending rates, hits 3-week high

• China maintains one-year and five-year loan prime rates
• Australian dollar records strong gains

The Australian dollar has posted strong gains on Wednesday. In the European session, AUD/USD is trading at 0.6496, up 0.67% and its highest level in three weeks.

China holds loans prime rates

China’s banks maintained their benchmark loan rates for September, a sign that the Chinese economy may be finding its footing after government support. As expected, the People’s Bank of China kept 1-year and 5-year loan prime rates at 3.45% and 4.2%, respectively. Recent Chinese releases have shown signs of improvement, including Friday’s retail sales and industrial production which beat expectations.

The world’s second-largest economy has deteriorated over the past few months and a CPI report in July which showed the economy was experiencing deflation set off alarm bells in the markets. The PBoC decision was seen as a vote of confidence in the economy, and the Australian dollar has responded with strong gains.

The RBA minutes, released on Tuesday, noted that board members listed weak domestic demand and contagion from China’s slowdown as risk factors for an economic slowdown. Despite these concerns, the RBA has signalled that inflation remains too high and has left the door open to further hikes. Inflation is currently running at 6% and the RBA has forecast that inflation will slow to around 3.25% by the end of 2024 and won’t fall back into the 2%-3% target range until late 2025.

It’s decision day at the Federal Reserve, which is widely expected to hold rates for only the second time in the current rate-tightening cycle. That doesn’t mean the meeting will be a sleeper. Investors will be interested to see if there are any revisions to the June dot plot, which projected one more hike this year and 100 basis points in rate cuts in 2024. Any changes in these forecasts could shift the Fed rate odds for the October meeting, which are currently at 27%, according to the FedWatch tool.

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AUD/USD Technical

• AUD/USD is testing resistance at 0.6477. The next resistance line is 0.6524
• 0.6428 and 0.6332 are the next support levels

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