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AUD/USD looks to US election for relief

AUD/USD experiences volatility amid US election speculation and changes in Australian inflation data.

AUD USD Source: Adobe images

AUD/USD hit by US election-driven USD demand

AUD/USD closed lower last week at 0.6559, a decline of 0.68%, marking its fifth consecutive week of losses. This was also its largest monthly drop since September 2022, falling by 4.81%.

The decline was primarily driven by traders increasing their long positions on US dollar (USD) in anticipation of a Republican win in the upcoming US election. A Republican victory is expected to lead to higher tariffs, inflation, deficits, and yields, strengthening the US dollar at the expense of the Australian dollar (AUD).

Adding to the pressure on the AUD, Australian third quarter (Q3) inflation data showed a significant decline ahead of tomorrow's Reserve Bank of Australia (RBA) board meeting.

Political shifts and currency impact

Over the weekend, the latest US election polls showed that the odds of a Republican sweep have decreased to around 37%, down from 48% two weeks ago. Meanwhile, the likelihood of a Democratic win with a split Congress has increased to about 27%.

This shift has weighed on the US dollar, as traders unwind some of the 'USD Trump Trade' premium. This development has boosted AUD/USD, which is now trading around 0.6615 - 0.6620, an increase of 0.85% from its Saturday close of 0.6559.

A Democratic win could serve as a 'get-out-of-jail-free' card for AUD/USD, potentially pushing it higher toward 0.6850. Conversely, a Republican sweep could drive the pair down to around 0.6350.

RBA board meeting preview

Date: Tuesday, 5 November at 2.30pm AEDT

Australia’s Q3 inflation data last week revealed that headline inflation decreased to 2.8% year-on-year (YoY), down from the previous 3.8%, which falls within the RBA's target range of 2% to 3%.

The decline was largely due to electricity rebates and lower petrol prices. The RBA’s September statement noted that government rebates are considered temporary and are typically discounted in its analysis.

The trimmed mean, seen as a more reliable inflation measure, also decreased to 3.5% from 4%, indicating a possible shift toward an RBA interest rate-cutting cycle. However, the strength of the labour market - adding 267,000 jobs over the last six months - suggests RBA rate cuts may be deferred until early 2025.

As a result, we expect the RBA to keep rates steady at 4.35% tomorrow. Forecast adjustments are likely, with gross domestic product (GDP) growth for the end of 2024 possibly revised down to 1.5% from 1.7%, and headline and trimmed-mean inflation forecasts also decreasing to 2.8% and 3.4% YoY, respectively.

RBA cash rate chart

RBA cash rate chart Source: Australian Bureau of Statistics
RBA cash rate chart Source: Australian Bureau of Statistics

AUD/USD technical analysis

AUD/USD has been on a downward trend, rejecting multi-month downtrend resistance around 0.6900 - 0.6910 in late September, stemming from the 0.8007 high of February 2021 and the 1.1081 high from July 2011.

AUD/USD weekly chart

AUD/USD weekly chart Source: TradingView
AUD/USD weekly chart Source: TradingView

Midway through last week, persistent downward pressure saw AUD/USD hit an 11-week low of 0.6536.

Today's rebound has AUD/USD challenging resistance at the 200-day moving average of 0.6628. A sustained break above this level, along with surpassing horizontal resistance around 0.6700 - 0.6720, would negate downside risks and pave the way for a rally towards 0.6850.

AUD/USD daily chart

AUD/USD daily chart Source: TradingView
AUD/USD daily chart Source: TradingView
  • Source: TradingView. The figures stated are as of 4 November 2024. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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