How does the RBA's dovish pivot affect AUD/USD?

AUD/USD ends week lower amid RBA's dovish shift

AUD/USD ended last week at 0.6362, down 0.42%, hovering near one-year lows after significant intra-week volatility influenced by a dovish shift from the Reserve Bank of Australia (RBA) and strong domestic jobs data.

Market reaction and labour report impact

AUD/USD’s decline from the 30 September high of 0.6942 accelerated following the RBA’s dovish pivot. The Board noted that it is 'gaining confidence' that inflation is declining in line with forecasts towards target. This pivot followed Australia’s lacklustre third-quarter (Q3) gross domestic product (GDP) figures, which increased the probability of a February RBA interest rate cut to 65%, pushing AUD/USD to a low of 0.6336.

However, just 48 hours later, a strong November labour report showing the Australian economy added 35,600 new jobs and a drop in unemployment to 3.9% quickly altered market perceptions, with AUD/USD springboarding to a high of 0.6429.

US dollar strength and upcoming events

The final leg of AUD/USD roller-coaster ride last week came as the United States (US) dollar received a boost following warm US consumer price index (CPI) and producer price index (PPI) readings, which raised concerns regarding the potential magnitude of Federal Reserve (Fed) rate cuts in 2025.

This week, attention will be on Wednesday’s Australian Westpac Consumer Confidence survey, which is expected to show its fourth consecutive monthly increase, supported by the RBA’s dovish pivot and robust jobs data.

In the US, the focus will be on Thursday's Federal Open Market Committee (FOMC) meeting, which is expected to deliver a 25 basis point (bp) rate cut and feature the Fed's preferred measure of inflation, the core personal consumption expenditures (PCE) price index.

Westpac Australian consumer confidence chart

AUD/USD technical analysis

AUD/USD rejected multi-month downtrend resistance at 0.6900-0.6910 in late September, coming from the 0.8007 high of February 2021 and the 1.1081 high from July 2011. Its weekly close of 0.6362 was right on multi-month trend line support, coming in at approximately 0.6370-0.6350.

AUD/USD weekly chart

From its late September 0.6942 high to last week's 0.6336 low, AUD/USD has fallen 8.70% over an 11-week period.

While AUD/USD is deeply oversold on most metrics, it is crucial for the pair to remain above the key support zone of 0.6370-0.6335 (on a closing basis, adjusted slightly to account for last week’s 0.6336 low). This would allow AUD/USD to avoid further declines towards the 0.6270 low of October 2023 and the 0.6170 low of October 2022, which could precede a test of the psychologically significant 0.6000 level.

Should AUD/USD hold above support at 0.6370 to 0.6335, a bounce is expected initially towards 0.6450 to 0.6470, with potential thereafter towards 0.6550.

AUD/USD daily chart

• _{Source: TradingView. The figures stated are as of 16 December 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.}