The Australian Dollar (AUD) continues to face downward pressure, extending its losses for the fourth consecutive day against the US Dollar (USD). The AUD/USD pair hovers near two-year lows on Friday, with market sentiment affected by forecasts of a potential 25 basis points (bps) rate cut by the Reserve Bank of Australia (RBA) in February. Investors are now focusing on upcoming US labor market data, including the highly anticipated Nonfarm Payrolls (NFP) report, for further guidance on global policy trends.
RBA Rate Cut Expectations and Mixed Economic Data
The Australian Dollar received no support from China’s latest inflation data, which highlighted growing deflationary risks. China’s Consumer Price Index (CPI) showed a modest 0.1% year-over-year increase in December, matching market expectations but lower than the previous month’s 0.2% rise. Monthly CPI inflation remained unchanged at 0%, signaling concerns about economic stagnation. As China and Australia share close trading ties, any shifts in Chinese economic conditions could have significant implications for the Australian economy.
Additionally, Australia’s November Retail Sales rose by 0.8%, better than October’s 0.5% increase, though it fell short of market expectations for a 1.0% rise. The trimmed mean inflation measure also showed a decline to 3.2% year-over-year from 3.5%, nearing the RBA’s target range of 2-3%. While markets remain divided on the likelihood of a February rate cut, expectations of a quarter-point reduction in April are fully priced in.
Hawkish Fed Outlook Drives USD Strength
The US Dollar remains resilient, bolstered by hawkish signals from Federal Reserve officials and growing concerns over trade policy under President-elect Donald Trump’s administration. The Fed’s latest meeting minutes highlighted that policymakers expect a longer-than-anticipated process in bringing inflation down, further supporting a cautious stance on rate cuts. Fed officials, including Susan Collins and Michelle Bowman, have emphasized the need for careful decision-making due to uncertainty in the economic outlook, with rates likely to remain elevated until inflation shows more definitive signs of cooling.
US labor market data also provided positive signals, with Initial Jobless Claims falling to 201,000 for the week ending January 3, outperforming expectations. The ADP Employment Change showed a 122K rise in December, though slightly below market expectations. Meanwhile, the US ISM Services PMI rose to 54.1 in November, indicating strong economic momentum, which further strengthens the outlook for the USD.
Australia’s Trade Surplus and CPI Data
Australia’s trade surplus improved to 7.079 billion AUD in November, exceeding expectations and bolstering the economic outlook. Exports increased by 4.8% month-on-month, while imports grew by 1.7%. Meanwhile, Australia’s Consumer Price Index (CPI) rose by 2.3% year-over-year in November, slightly exceeding market forecasts, but remaining within the RBA’s target range for the fourth consecutive month.
Technical Outlook: Bearish Momentum for AUD/USD
Technically, the AUD/USD pair maintains a bearish bias, trading near 0.6200. The pair remains within a descending channel on the daily chart, with the 14-day Relative Strength Index (RSI) hovering just above 30, signaling a potential for further downside momentum. Key support is expected near the lower boundary of the descending channel at 0.5960, while immediate resistance lies around the nine-day Exponential Moving Average (EMA) at 0.6216, followed by the 14-day EMA at 0.6230. The upper boundary of the descending channel near 0.6240 remains a stronger resistance level.
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