The Australian Dollar (AUD) showed signs of recovery on Monday, successfully breaking its two-day downturn against the US Dollar (USD). This rebound was aided by rising prices in metals, yet the potential for further gains remains constrained. Market participants are exercising caution as they await the inauguration of President-elect Donald Trump, especially given uncertainties regarding his proposed policies, which include tariffs, tax cuts, and immigration reforms. The USD may strengthen as traders navigate these uncertainties, particularly since the US markets are closed for Martin Luther King Jr. Day.
In parallel, the People’s Bank of China (PBOC) opted to keep its Loan Prime Rates steady, with the one-year rate at 3.10% and the five-year at 3.60%. As Australia heavily depends on trade with China, any fluctuations in the Chinese economy could significantly affect the Australian markets. Recent economic indicators out of China reflect a positive economic trajectory, with the country’s GDP growth reaching 5.4% year-on-year in the fourth quarter of 2024, surpassing forecasts.
Despite this bullish data from China, the AUD faces potential headwinds as speculation mounts around the Reserve Bank of Australia’s (RBA) possible rate cuts beginning next month. Investors are wary and are especially focused on the upcoming quarterly inflation report set for release next week, as it could provide important insights into future monetary policy directions.
Meanwhile, the US Dollar Index (DXY) is hovering around 109.30, bolstered by a rise in US Treasury yields amid anxiety about the potential impacts of Trump’s policy promises. Observers are keenly interested in Trump’s intended executive actions expected soon after he is sworn in. While most economists predict that the Federal Reserve will maintain current interest rates in January, a return to rate hikes is largely anticipated by March.
Recent US economic data showed a see-saw scenario where retail sales rose by 0.4% in December — a figure less than expected — and the Consumer Price Index increased by 2.9% year-over-year, aligning with forecasts. The labor market appears to be stabilizing, providing a potential positive backdrop for the economy as manufacturing activity experienced slight declines.
The technical outlook for the AUD/USD suggests the pair is aiming to hold above the 0.6200 support level. Current trading around 0.6210 indicates it is on the brink of breaking through a descending channel. Successful ascension would weaken the bearish pressure, but indicators reveal that caution is warranted as the price remains under the influence of broader market sentiments. Immediate support is noted at around 0.6202, while a more critical level is at 0.6131, which could signal further declines if breached.
