The Australian dollar (AUD) saw a bit of a rebound against the US dollar (USD) on Monday, marking the end of a three-day decline. However, there’s a chance that AUD/USD might still drift lower as the USD gains strength, especially with the likelihood of a rate cut by the US Federal Reserve in December diminishing.
Surprisingly, the Australian dollar didn’t fully capitalize on the economic reports that came out on Monday from both Australia and China. According to the TD-MI inflation gauge, there was a month-on-month increase of 0.3% in October. This was a slight slowdown compared to September’s 0.4% rise, and it represented the second consecutive month of increases. In contrast, the year-on-year inflation ticked up to 3.1% from the prior 3.0%.
Building permits in Australia surged by 12.0% month-on-month, recovering from a 3.6% drop in August and surpassing the expected 5.5% increase. However, ANZ’s job advertisements dipped by 2.2% month-on-month in October, following a revised 3.5% decrease the month before, marking the fourth month of decline.
Meanwhile, China’s Manufacturing Purchasing Managers Index (PMI) for October fell to 50.6 from 51.2 in September, while the market had predicted a reading of 50.9. Since Australia has strong trade ties with China, shifts in the Chinese economy could definitely have repercussions for the Australian dollar.
Traders are treading carefully as they await the Reserve Bank of Australia’s (RBA) policy decision on Tuesday. There are expectations that the central bank will maintain current interest rates after a series of three cuts, given that inflation rates for the second quarter are still within the targeted range of 2% to 3%.
USD Gains as Fed Rate Cut Prospects Shrink
- The US dollar index (DXY), which gauges the USD against six major currencies, has been on the rise, hovering around 99.80 as of the latest updates. The US ISM Manufacturing PMI report is also due for release later today.
- Federal funds futures indicate a 69% probability of a rate cut in December, down from 93% just a week ago, based on data from the CME FedWatch tool.
- Fed Chairman Jerome Powell mentioned in a recent press conference that another rate cut in December is not guaranteed. He advised a cautious approach, suggesting policymakers may need to wait for more official data.
- On Wednesday, the Federal Reserve voted to lower interest rates by 25 basis points, bringing the benchmark rate to a range of 3.75% to 4.0%. This decision wasn’t unanimous, as Fed Director Stephen Milan favored a more substantial 50 basis point cut, while Kansas City Fed President Jeffrey Schmidt wanted to maintain current rates.
- Traders are likely feeling skittish amid a prolonged government shutdown, which might raise worries about the US economy. The stalemate in Congress over a Republican-led funding bill is now into its sixth week, with no clear resolution in sight.
- China’s NBS Manufacturing PMI plummeted to 49.0 in October, down from 49.8 in September, exceeding the expected 49.6 for that period. Conversely, the NBS Non-Manufacturing PMI edged up slightly to 50.1 compared to previous readings and market predictions of 50.0.
- For the third quarter, the RBA’s trimmed average CPI rose by 1.0% quarter-over-quarter and 3.0% year-on-year. Expectations had been for increases of 0.8% and 2.7%, respectively. The monthly consumer price index showed a 3.5% rise year-on-year in August, surpassing the earlier estimate of 3.1%.
- Australia’s stronger-than-anticipated inflation data for the third quarter has lessened hopes for a rate cut from the RBA in the immediate term. RBA Governor Bullock pointed out some tightness in the labor market, despite the unexpected unemployment uptick.
Australian Dollar Holds Steady Around 0.6550 amidst Consolidation
The AUD/USD combination is trading near 0.6550 on Monday. Technical charts suggest the pair is in a consolidation phase, moving sideways within an established pattern. Still, it’s just above the 9-day exponential moving average (EMA), hinting at some short-term price momentum.
The psychological barrier sits at 0.6600, followed by the upper limit of the pattern near 0.6630. If the pair breaks above this rectangle, it could signal a bullish trend and create space for the AUD/USD to explore levels around 0.6707, which is a 13-month peak noted on September 17.
Conversely, major support is established at the 9-day EMA around 0.6544. Falling below this level could dampen short-term momentum, possibly leading the AUD/USD to hover near the lower boundary of the pattern around 0.6460, potentially heading toward a five-month low near 0.6414.
