The USD began 2025 on solid footing after December’s ISM services report delivered data that dampened hopes for rate cuts. This strength in the dollar has weighed on AUD/USD, keeping the pair under pressure as inflationary concerns resurface.

December’s ISM and PMI Data

As traders gradually return from the holiday season, December’s ISM and PMI figures have begun to draw attention. The ISM services index rose by 2 points to 54.1, signaling continued expansion in the sector. However, it was the “prices paid” index that grabbed the spotlight, surging to 64.4 the fastest pace of growth in nearly two years and a sharp 6.2-point increase from the previous month.

Other key metrics from the ISM services report also painted a picture of robust economic activity:

• Business activity rose by 4.5 points to 58.2.
• New orders edged up 0.5 points to 54.2.

One survey respondent noted that inflationary pressures are intensifying, casting doubt on the likelihood of interest rate cuts. This sentiment is reinforced by the strength of the U.S. economy, even as markets had hoped for less aggressive inflationary trends.

Manufacturing Data Adds to the Picture

The ISM manufacturing index also exceeded expectations, contracting at its slowest pace since March. Its “prices paid” and “new orders” components both showed expansion, with the index hitting 52.5. Similarly, the S&P Global manufacturing data indicated an easing in the contraction, beating expectations by 1.1 points.

This solid economic backdrop has left traders skeptical about the Federal Reserve’s ability to implement rate cuts in 2025. Fed fund futures now suggest just a 44.8% chance of a 25 basis point cut in June, which has supported a rebound in the USD index, offsetting some of Monday’s losses.

USD Technical Outlook

On the weekly chart, the USD index remains firmly bullish but is showing resistance at its 2024 high. The daily chart reveals strong support at the 20-day EMA, a level favored by bulls for dips. However, with market liquidity still recovering from the holiday lull, trading ranges may remain narrower in the short term.

AUD/USD Under Pressure

The Australian dollar faces a challenging outlook, with a potential move below its 2022 low appearing increasingly likely. While AUD/USD could briefly dip below 0.6170, this might trigger a bear trap, offering a short-term bounce toward 63 cents before resuming its downward trajectory.

Unless unexpected positive developments such as less restrictive trade policies emerge to lift risk sentiment, the AUD/USD appears set for further declines. A break below the 2022 low could open the door to a move toward 60 cents in the coming months.