The Australian Dollar (AUD) extended its gains against the US Dollar (USD) for a second consecutive day on Tuesday, recovering from a two-year low of 0.6131. The AUD/USD pair strengthened as the Australian Dollar benefitted from robust commodity prices, with mining and energy stocks leading the charge in the S&P/ASX 200, which rose by 0.2% to around 8,210, breaking a three-day losing streak.
In contrast, Australia’s Westpac Consumer Confidence Index showed a second consecutive monthly drop, falling 0.7% to 92.1 points in January 2025, highlighting persistent consumer pessimism. Additionally, markets are pricing in a 75% probability of a rate cut by the Reserve Bank of Australia (RBA) next month, prompting traders to focus on upcoming Australian employment data for more clarity on the central bank’s policy direction.
The AUD also received some support from China’s recent stimulus measures, given the close economic ties between the two nations. Changes in China’s economic conditions could significantly impact Australian markets.
US Dollar Gains Amid Strong Labor Data and Fed Hawkishness
The US Dollar Index (DXY), which tracks the USD against six major currencies, is currently trading near 109.60, its highest level since November 2022. The USD has strengthened following strong US labor market data for December, which fueled expectations that the Federal Reserve (Fed) will maintain its current interest rate levels in January.
US Treasury yields have risen in response to the labor data, with the 2-year yield climbing to 4.42% and the 10-year yield reaching 4.80%. December’s Nonfarm Payrolls (NFP) report showed an increase of 256K jobs, surpassing the market’s 160K estimate and the revised November figure of 212K.
Federal Reserve officials, including Michelle Bowman and Kansas Fed President Jeffrey Schmid, have indicated a more gradual approach to future rate cuts, with Schmid suggesting that the Fed’s interest rate policy is nearing its long-term equilibrium.
China’s Economic Policies and Inflation Outlook
On the global front, the People’s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) have increased the macro-prudential adjustment parameter for cross-border financing. This move is part of broader efforts to support the Chinese Yuan, as confirmed by the China Foreign Exchange Committee (CFXC). In addition, China’s TD-MI Inflation Gauge rose 0.6% month-over-month in December, marking an acceleration from November’s 0.2% increase, signaling potential inflationary pressures.
PBOC Governor Pan Gongsheng reaffirmed China’s plans to maintain ample liquidity using interest rate and reserve requirement ratio (RRR) tools and highlighted the nation’s commitment to being a driving force in the global economy.
Technical Outlook: AUD/USD Faces Resistance at 0.6200
The AUD/USD pair is currently trading around 0.6190, continuing its recovery from oversold conditions, as indicated by the 14-day Relative Strength Index (RSI), which has climbed above 30. Immediate resistance lies at the nine-day Exponential Moving Average (EMA) at 0.6193, followed by the 14-day EMA at 0.6210. A more significant resistance level can be found near the upper boundary of the descending channel, around 0.6230.
On the downside, the pair may test support at the lower boundary of the descending channel, near the 0.5940 level.
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