What is driving AUD/USD to a 13-month low?

AUD/USD pressured by GDP and US data

AUD/USD finished lower last week at 0.6389 (-1.92%), marking its lowest weekly close in 13 months.

The decline from the 30 September high of 0.6942 accelerated last week after Australia's third-quarter (Q3) gross domestic product (GDP) figures released on Wednesday fell short of expectations by a significant 0.2%. As noted in the Reserve Bank of Australia (RBA) preview below, this has led the Australian interest rate market to anticipate a first rate cut by the RBA within the first four months of 2025.

Impact of US non-farm payrolls and Chinese data

Pressure increased further on Friday night as the release of United States (US) non-farm payrolls data strengthened the US dollar. Total payrolls bounced back to 227,000 from a revised 36,000, reversing the previous month's strike and storm-related downturns.

Contributing to negative sentiment in the Asian time zone today, Chinese consumer price index (CPI) and producer price index (PPI) figures fell short of expectations. CPI decreased by 0.6% month-on-month (MoM) in November following a 0.3% drop in October, missing the predicted 0.4% decline.

The annual rate of headline inflation rose by 0.2% year-on-year (YoY) in November, its lowest rate since June, missing the 0.5% expected. While the 2.5% decline in PPI was less than the -2.8% expected, it marked the 26th consecutive month of producer deflation.

China’s economic challenges and potential tariffs

China, the world's second-largest economy and Australia's largest trading partner, is preparing for potential new tariffs from a second Donald Trump administration, on top of the growth and deflationary challenges it continues to experience. There remains a strong case for fiscal stimulus, however, it is expected to be held back to cushion the impact of tariffs when they inevitably arrive.

RBA's November inflation focus

At its last meeting in November, the RBA kept its official cash rate on hold at 4.35% for an eighth straight meeting.

In the accompanying statement, the RBA noted that while higher interest rates were working to bring demand and supply closer to balance, underlying inflation (as measured by the trimmed mean) at 3.5% is 'still some way from the 2.5 per cent midpoint of the inflation target.' The forecasts published in today’s Statement on Monetary Policy (SMP) do not see inflation returning sustainably to the midpoint of the target until 2026.

The RBA, as expected, looked through the Q3 step down in headline inflation. 'This was expected due to declines in fuel and electricity prices in the September quarter' while noting that 'underlying inflation is more indicative of inflation momentum, and it remains too high.'

This week's key local events are tomorrow's RBA Board meeting and Thursday's Labour Force report for November.

RBA interest rate decision

Date: Tuesday, 10 December at 2.30pm AEDT

At tomorrow's Board meeting, the RBA is expected to keep its official cash rate at 4.35% for the ninth consecutive meeting, due to persistently high inflation. However, last week's disappointing Australian Q3 GDP figures may prompt a more dovish stance.

This potential shift could become apparent during the Q&A session, where RBA Governor Bullock may retract previous assurances against near-term rate cuts. Instead, Bullock might indicate that the decision on the February cash rate will depend on upcoming inflation data and revised staff forecasts, paving the way for a possible rate cut.

The interest rate market currently assigns a 46% probability to a 25 basis point (bp) rate cut by the RBA in February and a 100% probability to a 25 bp rate cut in April.

RBA cash rate 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. At its 0.6372 low last week, it reached the vicinity of multi-month trend line support at 0.6370 - 0.6350.

AUD/USD weekly chart

From its late September 0.6942 high to last week's 0.6372 low, AUD/USD has fallen 8.25% over a ten-week period.

It is crucial for AUD/USD to remain above the key support zone of 0.6370 - 0.6350 to avoid further declines toward 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.

AUD/USD daily chart

• _{Source: TradingView. The figures stated are as of 9 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.}