- The Australian Dollar remains above 0.6350 in the Asian session.
- US Dollar falls as markets anticipate Fed rate cut.
- US preliminary PMIs failed to give traction to USD.
The Australian Dollar maintains the bounce above 0.6350 in the Monday session, supported by mixed economic data from China and a softer US Dollar. Traders remain focused on Wednesday’s Federal Reserve (Fed) interest rate decision, which could influence near-term price action.
On the data front, S&P PMIs were strong but failed to give traction to the USD.
Daily Market Summary: Australian Dollar Maintains Gains as USD Fails to React to Strong S&P PMI
- The US S&P Global Composite PMI rose to 56.6 in December’s flash estimate from 54.9, reflecting accelerated private sector growth, while the services PMI improved to 58.5 from 56.1.
- In contrast, the manufacturing PMI fell to 48.3 from 49.7, highlighting an uneven performance of the sector.
- Despite strong US data, USD weakness persists ahead of the Fed decision, offering a slight boost to the Australian Dollar.
- Mixed data from China and a strong Australian labor market offer some support to the Australian dollar, but the upside remains limited by Fed uncertainty.
- For the Fed’s decision on Wednesday, markets have practically priced in a cut, but the bank’s message will be key.
AUD/USD Technical Outlook: Australian Dollar flirts with oversold conditions as momentum weakens
The Relative Strength Index (RSI) sits near 34, hovering in oversold conditions with little directional bias. Meanwhile, the MACD histogram prints decreasing red bars, underlining the weakening momentum. With the pair deep in negative territory, an upward correction could occur if the USD continues to weaken. This could be triggered on Wednesday after the Fed’s decision.
The Australian Dollar FAQs
One of the most important factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). As Australia is a resource-rich country, another key factor is the price of its largest export, iron ore. The health of the Chinese economy, its largest trading partner, is a factor, as is inflation in Australia, its growth rate and the Balance of Trade. Market sentiment, that is, whether investors bet on riskier assets (risk-on) or seek safe havens (risk-off), is also a factor, with the risk-on being positive for the AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The RBA’s main objective is to maintain a stable inflation rate of 2%-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low ones. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former being negative for the AUD and the latter being positive for the AUD.
China is Australia’s largest trading partner, so the health of the Chinese economy greatly influences the value of the Australian Dollar (AUD). When the Chinese economy is doing well, it buys more raw materials, goods and services from Australia, which increases demand for the AUD and drives up its value. The opposite occurs when the Chinese economy does not grow as fast as expected. Therefore, positive or negative surprises in Chinese growth data usually have a direct impact on the Australian Dollar.
Iron ore is Australia’s largest export, with $118 billion a year according to 2021 data, with China being its main destination. The iron ore price, therefore, may be a driver of the Australian dollar. Typically, if the price of iron ore rises, the AUD also rises as aggregate demand for the currency increases. The opposite occurs when the price of iron ore falls. Higher iron ore prices also tend to result in a higher likelihood of a positive trade balance for Australia, which is also positive for the AUD.
The trade balance, which is the difference between what a country earns from its exports and what it pays for its imports, is another factor that can influence the value of the Australian dollar. If Australia produces highly sought-after exports, its currency will gain value solely from the excess demand created by foreign buyers wanting to purchase its exports versus what it spends on purchasing imports. Therefore, a positive net trade balance strengthens the AUD, with the opposite effect if the trade balance is negative.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
