The Australian Dollar (AUD) is under pressure as global economic forecasts evolve, with significant implications for its future performance. According to Goldman Sachs, the recent adjustments in both US and European economic predictions signal a turbulent period for the AUD, exacerbated by ongoing trade tensions and domestic challenges in Australia.
This shift in outlook is tied to a series of changes in policy and economic activity across the globe. Goldman Sachs’ recent report outlines the factors influencing the Australian currency, underscoring the complexities within the foreign exchange (FX) markets.
While the US experiences downward revisions in its growth outlook, Europe’s more optimistic view contrasts sharply. As a result, the AUD’s position looks increasingly precarious in the face of economic turbulence.
US Growth Forecasts Downgraded, European Optimism Persists
Goldman Sachs’ US economists have revised their growth forecasts, marking a downward adjustment for the first time in nearly three years. This move has placed their predictions below consensus, indicating potential economic headwinds for the world’s largest economy.
On the other hand, European economists responded positively to Germany’s fiscal policies, particularly its ambitious spending plans, by upgrading their Euro area growth projections.
This divergence in economic trajectories, with the US slowing and Europe accelerating, directly influences foreign exchange markets. Goldman Sachs’ FX forecasts have been revised to reflect less appreciation for the US Dollar, with a more cautious outlook overall.
According to the investment bank, the market reset observed in recent weeks is a reflection of these changes, but it does not imply that the US Dollar will lose ground in the long run. The balance between US policy changes and foreign reactions remains crucial in determining the future trajectory of the Dollar.
Australian Dollar Under Pressure from Trade and Domestic Challenges
The Australian Dollar faces unique pressures, particularly from its trade relations with China and domestic economic conditions.
Goldman Sachs notes that China’s ongoing economic struggles have a direct impact on Australia’s export-driven economy, particularly in commodities such as iron ore. As demand weakens, Australia’s terms of trade are expected to continue their decline, which could further weaken the AUD.
Furthermore, Australia’s economic model, which heavily relies on immigration-driven labour market expansion, faces limits in dealing with inflationary pressures. According to Goldman Sachs, this could force the Reserve Bank of Australia (RBA) into a cycle of rate cuts, which would add to downward pressure on the AUD.
The potential for a “gas shock” could exacerbate the situation, but political factors make it unlikely that energy prices will rise significantly. Instead, energy rebates are expected to increase as the AUD declines.
The outlook for the Australian Dollar remains closely tied to global dynamics and domestic challenges, with Goldman Sachs forecasting a turbulent period for the currency in the near future.
