The Australian Dollar (AUD) retraced its recent gains against the US Dollar (USD) following the People’s Bank of China (PBoC) decision to leave its one- and five-year Loan Prime Rates (LPRs) unchanged at 3.10% and 3.60%, respectively. The lack of any rate change signals that China is maintaining a cautious approach to monetary policy, which weighs on the AUD, given Australia’s close ties with China.
Meanwhile, Australia’s Private Sector Credit grew by 0.5% MoM in November, in line with expectations. On an annual basis, it rose by 6.2%, the highest growth rate since May 2023, indicating some stability in the domestic economy. However, concerns about the Reserve Bank of Australia‘s (RBA) possible rate cuts, expected to begin in February amid signs of economic slowdown, continue to pressure the Australian currency.
US Dollar Strengthens as Economic Data Surpasses Expectations
The US Dollar gained strength following better-than-expected US economic data. The third-quarter GDP growth of 3.1% surpassed market expectations, and Initial Jobless Claims dropped to 220,000, indicating continued strength in the US labor market. This positive data, combined with the Fed’s hawkish stance after a 25 basis point rate cut on Wednesday, bolstered the USD, particularly after the Fed’s Summary of Economic Projections indicated a slower pace of rate cuts in 2025.
RBA Rate Cut Expectations and Inflation Pressures
The Australian Dollar faces increasing pressure as markets anticipate the RBA may begin cutting rates as early as February. NAB’s forecast suggests a possible rate cut in May 2025, with unemployment expected to peak at 4.3% before gradually improving. Inflation is projected to ease gradually by late 2025, but persistent inflation concerns, particularly with December’s Consumer Inflation Expectations rising to 4.2%, could delay a rate cut.
Meanwhile, global risk sentiment, influenced by Fed tightening and Chinese economic challenges, weighs on investor sentiment towards the AUD. Reports suggest China will target 5% economic growth in 2025, which aligns with expectations but highlights the subdued growth outlook.
Technical Outlook for AUD/USD
The AUD/USD pair remains in a bearish trend, trading near 0.6230 on Friday. The daily chart shows the pair is still confined within a descending channel pattern. However, the 14-day Relative Strength Index (RSI) is below 30, signaling oversold conditions and suggesting that an upward correction could be imminent.
Key support for AUD/USD lies around the channel’s lower boundary near 0.6130, which is critical for the continuation of the current bearish trend. On the upside, the pair faces resistance at the nine-day Exponential Moving Average (EMA) near 0.6310, followed by the 14-day EMA at 0.6346. A decisive break above the channel’s upper boundary at 0.6390 could open the door for further upside, with 0.6687 as the next significant target.
Outlook: Risk of Continued Weakness for the AUD
Given the current economic backdrop, with expectations of an RBA rate cut and a strong USD, the AUD/USD pair is likely to face continued downward pressure. However, with the RSI indicating oversold conditions, a potential upward correction remains a possibility in the short term. Investors will closely monitor upcoming economic data, including the RBA’s meeting minutes, as well as global risk sentiment, to gauge the future direction for the Australian Dollar.
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