The Australian dollar (AUD) continued its downward trend against the US dollar (USD) on Wednesday, marking its fifth consecutive day of decline. Still, there’s some speculation in the market that a potential interest rate hike from the Reserve Bank of Australia (RBA) could offer some support for the AUD, especially with discussions about a raise as early as February.
Both Commonwealth Bank of Australia and National Australia Bank are now anticipating that the RBA will act sooner than earlier forecasts indicated. They cite ongoing inflation issues in an economy facing capacity limitations as the rationale. This comes after the central bank’s commitment to maintain interest rates at its last meeting for 2025. Market expectations now show a 28% chance of a rate increase in February, nearly 41% for March, and an almost certain increase by August.
Meanwhile, external pressures on the Australian dollar are evident, particularly as Australia’s preliminary S&P Global Manufacturing PMI for December was reported at 52.2, a slight increase from November’s 51.6. However, the Services PMI saw a drop from 52.8 to 51.0, and the Composite PMI also declined from 52.6 to 51.1.
The US dollar faces challenges amid shifting Fed expectations
- The US Dollar Index (DXY), which tracks the dollar against six major currencies, is stable at around 98.20. Inconsistent data from the labor market hasn’t really strengthened the case for more rate cuts by the US Federal Reserve, which could lend some support to the dollar.
- The November US employment report indicated a slight increase in jobs, with a 64,000 rise that was faster than expected. However, the prior month’s figures were revised down, and the unemployment rate climbed to 4.6%, the highest since 2021. Additionally, retail sales showed no growth, pointing to weakening consumer demand.
- Atlanta Fed President Rafael Bostic shared his views in a blog post, mentioning that the mixed job figures do not alter the overall outlook. He expressed his preference to maintain the current interest rates and noted that various surveys suggest rising input costs, with businesses keen on protecting margins through price hikes. He cautioned against rushing to proclaim victory regarding inflation, forecasting GDP growth of about 2.5% in 2026.
- A divergence among Fed officials exists regarding the need for additional monetary easing next year. While there’s consensus on just one median rate cut for 2026, some policymakers are cautious about any further reductions. Presently, traders are anticipating two rate cuts in the coming year.
- CME FedWatch indicates a 74.4% implied probability of maintaining current rates at the upcoming January US central bank meeting, a rise from approximately 70% a week prior.
- Regarding China, the National Bureau of Statistics reported a 1.3% annual increase in retail sales for November, falling short of the expected 2.9% rise. Concurrently, industrial production grew by 4.8% year-on-year, below a 5.0% forecast and down from a previous estimate of 4.9%.
- China’s fixed asset investment also reported a 2.6% decline year-to-date against last year, which is worse than the anticipated -2.3%. The October figure was at -1.7%.
- According to the Australian Bureau of Statistics, the unemployment rate held steady at 4.3% in November, slightly better than the market expectation of 4.4%. However, employment figures saw a drop from 41,000 in October (revised) to minus 21,000 in November, comparing unfavorably to a forecast of around 20,000.
The Australian dollar hovers near the channel boundary
Currently, AUD/USD is trading around 0.6630. Technical analysis indicates that the pair is within an ascending channel, reflecting a somewhat optimistic trend. However, it’s hovering around the 9-day exponential moving average (EMA), suggesting a neutral short-term price momentum.
Should the AUD/USD pair test the lower boundary of the ascending channel at approximately 0.6620, a breach could push it lower to around 0.6414, marking a six-month low recorded back in August.
On a more positive note, if the AUD/USD pair continues rising, a potential target could be the three-month high of 0.6685, followed by 0.6707—its peak since October 2024. Further upward movement could test the ascending channel boundary at around 0.6740.
