AUD/USD steadies ahead of AU inflation data
The AUD/USD made a hasty retreat last week as investors reassessed expectations of Fed rate cuts and reduced positions in risky assets, including the AUD/USD, which surged into year-end.
Can AUD/USD regain short-term traction?
It remains to be seen whether the AUD/USD can regain upside traction in the short term as this will depend on this week’s inflation release in Australia, which will be followed by inflation data in the US for December.
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AU monthly CPI indicator
Date: Wednesday, 10 January 11.30am AEST
At its board meeting in December, the Reserve Bank of Australia (RBA) kept its official cash rate on hold at 4.35%, as widely expected.
The decision followed a string of cooler-than-expected data across house prices, retail sales, and inflation and preceded a sub-par third-quarter gross-domestic product (Q3 GDP) print, which saw the Australian interest rate market dramatically shift from pricing in RBA rate hikes in 2024 to pricing in rate cuts.
At the time of writing, the Australian interest rate market is pricing in just under two full 25bp rate cuts in 2024, with the first-rate cut priced for August. The expectation of rate cuts is supported by the unemployment rate rising to 3.9% from 3.7% into year-end. The focus now turns to Wednesday's monthly CPI indicator for November.
In October, the monthly CPI indicator eased to 4.9% year-on-year (YoY), slowing from 5.6% in September and below forecasts for 5.2%. Annual trimmed mean inflation was 5.3% in October, edging reluctantly from 5.4% in September.
For November, the consensus expectation is for the Monthly CPI indicator to fall to 4.4% YoY from 4.5%. Should the trimmed mean fall below 5%, it would confirm the rates market is on the right track, looking for rate cuts in 2024. However, the risk is that core inflation remains stubbornly above 5%.
Monthly CPI indicator, Australia, annual movement (%)
AUD/USD technical analysis
From the October .6270 low to the December .6871 high, the AUD/USD gained just under 10% in two months. The rally was supported by expectations of aggressive Fed rate cuts up against more benign rate cut expectations for the RBA and the price of iron ore hitting a three-year high.
We suspect this dynamic probably remains in place and, as such, expect the AUD/USD to be well supported on dips towards .6600/.6580 and again at .6525 buy buyers looking for a retest of the .6871 high.
Aware that should the AUD/USD see a sustained break below support at .6520/00, it would create a high degree of technical damage to the uptrend from the .6270 low.
AUD/USD daily chart
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