The AUD/USD pair remains pinned to a crucial trendline as traders brace for today’s U.S. inflation report, which could significantly influence its direction. A weaker than expected inflation reading is the Aussie dollar’s best hope for a recovery, though the likelihood of such an outcome appears slim.
RBA Eases Hawkish Stance
The Reserve Bank of Australia (RBA) held interest rates steady at 4.35%, signaling a shift away from its hawkish bias by highlighting “weak growth” and reducing the emphasis on inflation risks. This shift effectively opens the door for rate cuts, aligning with market expectations of three 25 basis point reductions in April, July, and December next year.
Governor Michele Bullock emphasized that while inflation risks have eased, they haven’t disappeared entirely. However, RBA cash rate futures remain confident in their outlook, fully pricing in the anticipated cuts.
Fed Expectations and Market Sentiment
In the U.S., a Reuters poll shows that 90% of economists expect a 25 basis point rate cut at the Federal Reserve’s upcoming meeting, with a likely pause in January. Fed fund futures reflect similar probabilities, signaling an 86.1% chance of a cut next week and a 90.4% chance of a pause at the subsequent meeting.
Looking further ahead, projections suggest the Fed funds rate could fall to between 3.5% and 3.75% by the end of 2025, allowing for at least 100 basis points of cuts, including three reductions next year.
Global Market Dynamics Weigh on AUD
The Australian dollar faces additional headwinds from weak sentiment in global equity markets. Wall Street indices continued their declines on Tuesday, with the S&P 500, Nasdaq, and Dow Jones all posting losses ahead of the U.S. inflation report. The subdued performance of U.S. markets has also weighed on ASX 200 futures, which are down 2% from record highs following soft Australian GDP figures last week.
Meanwhile, USD strength remains a dominant theme across currency markets. USD/JPY reached a key resistance level of 152, USD/CAD touched a multi-year high ahead of the Bank of Canada’s rate decision, and USD/CHF showed further upside potential.
Key Economic Events in Focus
Today’s primary event is the U.S. inflation report, where core CPI is expected to remain steady at 0.3% month over month and 2.7% year over year. A stronger than expected reading could bolster the U.S. dollar further, putting AUD/USD’s key support at risk.
Other key events include:
- Japan’s PPI data (10:50 AEDT)
- RBA Chart Pack (12:30 AEDT)
- OPEC Monthly Report (21:00 AEDT)
- Bank of Canada interest rate decision (-50bp cut expected, 01:45 AEDT)
AUD/USD Technical Analysis
On the charts, AUD/USD is clinging to a 2022 trendline, showing signs of hesitation as it forms an inverted hammer pattern. However, the likelihood of holding this level through the week appears low given the looming U.S. inflation data.
A false breakout below the trendline during Tuesday’s session suggests some short-term resilience, but the pair remains under pressure from a stronger U.S. dollar and weaker Chinese yuan currencies with which the Aussie shares strong correlations.
Traders may use any bounce from current levels as an opportunity to build bearish positions, targeting a move towards 0.63. This level aligns with lower weekly implied volatility and a historical volume point of control (VPOC), offering potential support.
For now, AUD/USD’s outlook hinges on today’s inflation data, with the pair teetering on the edge of a breakdown or a short-lived recovery.
