The Australian Dollar (AUD) advanced on Monday, supported by positive domestic equity performance and a softening US Dollar (USD). The pair also benefitted from sustained market optimism around the Reserve Bank of Australia’s (RBA) hawkish stance on monetary policy.
Key Drivers Behind AUD/USD Momentum
Australian Market Strength and Foreign Inflows
The AUD found support as the S&P/ASX 200 Index surged 0.63% to reach a record high above 8,450, mirroring Wall Street’s momentum. On Friday, the Dow Jones Industrial Average closed at another all-time high, amplifying global risk appetite and driving foreign inflows into Australian assets.
RBA’s Hawkish Signals
The RBA’s November meeting minutes reiterated the central bank’s commitment to keeping rates restrictive until inflation shows clear signs of sustainable decline. While immediate policy adjustments were ruled out, upcoming economic data, including Australia’s October Monthly Consumer Price Index (CPI), will play a key role in shaping future decisions.
Australian banks diverged in their predictions for the RBA’s first rate cut. While Westpac and NAB now anticipate a May 2024 cut, CBA and ANZ are cautiously forecasting February as a possibility.
US Dollar Correction
The USD eased after hitting a two-year high last week, with the US Dollar Index (DXY) retreating to around 107.00. Expectations of slower Federal Reserve rate cuts have limited USD downside, supported by robust economic data, including a strong US Composite PMI reading of 55.3 for November.
Australian and US PMIs Diverge
Australia: The Judo Bank Australia PMI Composite Output Index fell to 49.4 in November, indicating modest contraction. Manufacturing and Services PMIs both dipped below the 50 threshold, pointing to weak domestic output.
United States: US PMI readings outperformed expectations, signaling growth in private-sector activity. The Services PMI surged to 57.0, marking the fastest expansion since March 2022.
Technical Analysis: AUD/USD at Crossroads
The AUD/USD pair climbed to 0.6540 on Monday, testing key short-term resistance levels:
Upside Potential: A breakout above the descending channel’s upper boundary at 0.6570 could signal a shift in momentum, targeting the four-week high of 0.6687.
Downside Risks: Support is seen near the nine-day EMA at 0.6520, with further declines potentially leading to the yearly low of 0.6348.
The 14-day RSI hovers near neutral, hinting at indecision but signaling room for further bullish momentum if it breaches the 50 threshold.
Outlook
The AUD/USD pair’s trajectory will largely hinge on upcoming CPI data from Australia and market sentiment around the RBA and Federal Reserve policies. While the AUD enjoys tailwinds from a strong domestic market and resilient RBA messaging, global risk sentiment and USD movements remain critical. Short-term gains may be capped unless the pair decisively breaks out of its broader downtrend.
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