The Australian Dollar (AUD) faced continued pressure against the US Dollar (USD) on Wednesday, extending losses for the second consecutive session despite stronger-than-expected inflation data from Australia. The AUD/USD pair remained under strain as traders awaited the release of the Federal Open Market Committee (FOMC) Minutes later in the day, alongside key US jobs data, including the Nonfarm Payrolls (NFP) report due on Friday, for further clues on future policy direction.
While Australia’s monthly Consumer Price Index (CPI) rose 2.3% year-over-year in November, surpassing market expectations of a 2.2% increase, the core inflation measure—trimmed mean—dipped slightly to 3.2% from 3.5%, bringing it closer to the Reserve Bank of Australia’s (RBA) target band of 2-3%. Despite this, traders are pricing in a 55% probability that the RBA will cut its cash rate by 25 basis points to 4.35% in February, with a further 25 basis point reduction expected by April.
Australia’s economic data, however, was mixed. Construction permits for new projects dropped 3.6% month-on-month in November, falling short of expectations. This followed a sharp 5.2% increase in October, signaling some weakness in the housing sector. At the same time, the energy bill relief rebate continues to cushion the impact on inflation, but the underlying price pressures suggest that the RBA may take a more dovish stance in the near term.
Fed’s Hawkish Shift Weighs on the Aussie
The US Dollar remains robust as market sentiment shifts in favor of tighter Federal Reserve policy. The US Dollar Index (DXY), which tracks the greenback against a basket of six major currencies, holds steady above 108.50, driven by the recent spike in US Treasury yields. The 10-year Treasury yield rose by more than 1% in the previous session, reaching 4.67%, a reflection of growing concerns about persistent inflation and the Fed’s hawkish stance.
The latest US economic data has reinforced these concerns. The ISM Services PMI for November rose to 54.1, well above the expected 53.3, while the Prices Paid Index, a gauge of inflation, jumped to 64.4 from 58.2. Meanwhile, the ISM Manufacturing PMI showed an improvement, ticking up to 49.3 in December from 48.4 in November, further signaling that the US economy remains resilient despite challenges.
Federal Reserve officials, including Atlanta Fed President Raphael Bostic and Richmond Fed President Thomas Barkin, have emphasized the need for caution in reducing interest rates amid uneven progress in taming inflation. This dovish caution supports a stronger US Dollar, placing additional pressure on the AUD.
Technical Outlook: Bearish Momentum Persists for AUD/USD
From a technical perspective, the AUD/USD pair remains entrenched in a bearish trend. The pair is trading around 0.6210 on Wednesday, well below its nine-day Exponential Moving Average (EMA), which currently sits at 0.6224. The 14-day Relative Strength Index (RSI) is retreating toward the 30 level, indicating that bearish momentum could intensify in the near term.
Key support lies near the lower boundary of the descending channel at 0.5990, which could come into play if the current downtrend continues. On the upside, immediate resistance is found around the nine-day EMA at 0.6224, followed by the 14-day EMA at 0.6239. The upper boundary of the descending channel at 0.6270 represents a further hurdle for the Australian Dollar, and any upward movement would likely encounter strong resistance around these levels.
In conclusion, while Australia’s inflation data was positive, the strengthening US Dollar driven by the Fed’s hawkish policy outlook continues to weigh on the AUD/USD pair. Traders are likely to remain cautious ahead of the FOMC Minutes and the US jobs data, with further downside risks for the Aussie in the short term.
Related Topics:
