The Australian Dollar (AUD) slipped on Monday, reversing gains made over the previous two days against the US Dollar (USD). The decline was driven by disappointing Consumer Price Index (CPI) data from China, Australia’s key trading partner, released on Sunday.
The AUD faced selling pressure following a report from the Commonwealth Bank of Australia, which projected a potential 25 basis point rate cut by the Reserve Bank of Australia (RBA) by the end of 2024. The report emphasized the need for a more significant disinflation trend than the RBA expects for the Board to consider easing its monetary policy this year.
Additionally, the AUD/USD pair’s decline was exacerbated by a strengthening USD, bolstered by growing expectations that the US Federal Reserve (Fed) may be slower to reduce borrowing costs than previously thought. According to the CME FedWatch Tool, the markets are now pricing in an 86.9% probability of a 25 basis point rate cut in November, with no anticipation of a 50-basis-point reduction.
The risk-sensitive AUD/USD pairing also faced pressure from escalating geopolitical tensions in the Middle East, where a drone attack in north-central Israel resulted in the deaths of at least four soldiers and injuries to over 60 individuals, according to CNN. In a related development, China’s military conducted drills in the Taiwan Strait, prompting concerns from the US State Department regarding the actions of the People’s Liberation Army (PLA). Taiwan’s Defense Ministry responded, stating, “We will not escalate conflict in our response.”
China’s National Bureau of Statistics reported that the country’s monthly CPI remained flat at 0% in September, a decline from August’s increase of 0.4%. The annual inflation rate rose by 0.4%, falling short of the expected 0.6%. Furthermore, the Producer Price Index (PPI) decreased by 2.8% year-on-year, a larger drop than the previous decline of 1.8% and exceeding forecasts of a 2.5% decrease.
On Saturday, the National People’s Congress expressed optimism after a briefing from China’s Ministry of Finance (MoF), which highlighted priorities aimed at stabilizing the property market and addressing local government debt. The MoF announced plans to issue special bonds to support bank recapitalization and stabilize the real estate sector.
In the US, the September Producer Price Index (PPI) remained unchanged at 0%, below the prior month’s increase of 0.2%. Meanwhile, the core PPI, excluding food and energy prices, rose by 0.2% as expected, down from 0.3% in the previous month.
Chicago Fed President Austan Goolsbee remarked to Bloomberg on the positive developments regarding inflation and the labor market, acknowledging progress despite a strong September jobs report and the absence of signs of economic overheating.
Last week, the Reserve Bank of Australia released the minutes from its September monetary policy meeting, indicating that board members evaluated potential scenarios for both rate cuts and increases in the future. The discussion revealed that future financial conditions may need adjustments to meet the Board’s objectives.
From a technical analysis perspective, the AUD/USD pair was trading around 0.6730 on Monday. The daily chart suggests that the pair is testing the upper boundary of a descending channel, with a potential momentum shift from bearish to bullish if it breaches this level. However, the 14-day Relative Strength Index (RSI) remains below 50, indicating continued bearish momentum.
In terms of resistance, the AUD/USD pair could test the nine-day Exponential Moving Average (EMA) at 0.6766, followed by the psychological barrier at 0.6800. Conversely, on the downside, it may approach the lower boundary of the descending channel at 0.6640, with a potential drop to the eight-week low of 0.6622 recorded on September 11.
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