The strength gained recently by the Australian Dollar was partly driven by improved market sentiment, broad China trade data, and rising commodity prices. An additional factor for the AUD is the stabilizing momentum as created by Beijing regarding stabilizing the Yuan. On the contrary side, the US Dollar has declined following the December Producer Price Index that came way worse than expected. Thus, as a result of this, traders are now focusing on upcoming US inflation data regarding future market trends.

Key Lookouts

• The Australian Dollar has benefitted from stronger market sentiment, buoyed by solid trade data from China and efforts by the Chinese government to stabilize the Yuan, while also seeing support from rising commodity prices.
• Weakness in US Dollar: Weakening of US Dollar was noticed after disappointing data on US Producer Price Index for December, as market participants expect the US Consumer Price Index, which could weaken USD further.
• The Australian consumer confidence remains vulnerable as the Westpac Consumer Confidence Index decreased 0.7% in January. Markets, in response to the fall, anticipate potential cuts in rates by the Reserve Bank of Australia in the near term.
• AUD/USD is now probing key resistances at 9-day EMA at 0.6193 and also touching the top border of the falling channel around 0.6220; the lower boundary of the falling channel around 0.5940 could test supports.

Consumer confidence in Australia’s Westpac Consumer Confidence Index slid by 0.7% in January. This continued the trend of pessimism, in part a response to the loss of AUD in value relative to the USD. Market pricing suggests a 67% probability of the RBA cutting the cash rate by 25 basis points in February, with cuts through to April. US NFP data reported an increase of 256K jobs in December; it was better than expected but did not produce the desired result as the mixed reaction in markets indicated.

Here are the key developments influencing the Australian Dollar and US Dollar dynamics in the current market environment:

• The Australian Dollar (AUD) has gained strength, buoyed by positive market sentiment, strong trade data from China, and rising commodity prices.
• Beijing’s attempts to stabilize the Yuan and positive trade data have been the main drivers in the strengthening of the AUD against other currencies.
• The US Dollar has weakened as the US Producer Price Index (PPI) for December came in below expectations.
• Market participants will be watching US Consumer Price Index data due next for further US inflation insights and direction on the Federal Reserve.
• The Westpac Consumer Confidence Index of Australia declined 0.7% in January, and is a continuation of consumer pessimism that the AUD is losing.
• Market expectations are pricing in a 67% chance that the Reserve Bank of Australia (RBA) will reduce its cash rate by 25 basis points in February, with further cuts expected by April.
• US Nonfarm Payrolls (NFP) for December came in at 256K, stronger than expected, which has added some complexity to the economic outlook.
• Federal Reserve officials, including Kansas Fed President Jeffrey Schmid, have indicated that any future interest rate cuts will be gradual, with a focus on data-driven decisions.
• The AUD/USD pair is trading within a descending channel, with resistance around 0.6193 and 0.6207, and potential support near the lower boundary of the channel at 0.5940.

Consumer confidence remains one concern in Australia. The Westpac Consumer Confidence Index fell by 0.7% in January, indicating that Australian households remain pessimistic. The decline in confidence is partly due to the depreciation of the AUD against the USD, which has caused concerns about the cost of living and economic conditions. Consequently, markets are factoring in a 67% chance of the Reserve Bank of Australia (RBA) to cut interest rates by 25 basis points in February and expect more cuts in April to sustain the economic activity.

AUD/USD Daily Price Chart

Source: TradingView, prepared by Jacob

Although there have been difficulties for the consumer sentiment in Australia, risk sentiment from other parts of the world has given some boost to the AUD. Strong trade data from China and rising commodity prices have helped boost the outlook for Australia’s economy, which is heavily reliant on exports. Moreover, Beijing’s efforts to stabilize the Yuan have contributed to a more favorable environment for risk-sensitive currencies like the AUD. With positive global factors at play, the Australian Dollar is likely to remain supported but its movement would be largely related to the future economic data released from Australia as well as from the US.

Technical Analysis

The AUD/USD pair is still trading within a descending channel on the daily chart, at around 0.6190. The immediate resistance is found at the 9-day EMA at 0.6193, then at the 14-day EMA at 0.6207. The next resistance is seen near the upper boundary of the descending channel, at around 0.6220. Support may be tested near the lower boundary of the channel, at around 0.5940, if the bearish momentum continues.

Support and Resistance Forecast

Support for the AUD/USD remains at 0.5940, which aligns with the lower boundary of the descending channel. If this level is unable to hold as support, it may open a way for even more downside action, potentially moving towards 0.5900. A violation below 0.5940 would be very bearish in nature and allow for a breakdown to even weaker levels in the short term.
The key resistance for the AUD/USD pair will be at 0.6193, with the 9-day Exponential Moving Average placed there, and at 0.6207, marked by the 14-day EMA. If the pair breaks above this level, it could test the upper boundary of the descending channel around 0.6220. A strong move beyond 0.6220 could signify a change in momentum, sending the pair further up to resistance zones around 0.6250 or 0.6300.