The Australian Dollar (AUD) demonstrated strength on Monday, recovering from recent losses despite the backdrop of heightened geopolitical tensions and a stronger US Dollar (USD). The AUD/USD pair made notable gains, even as the US grappled with the aftermath of a drone attack on a US outpost in Jordan that resulted in the tragic death of three service members and injuries to several others.
Reports indicate that the US administration, led by President Joe Biden, is actively formulating plans to respond to the attack, considering potential measures such as strikes into Iran. The mere contemplation of such actions marks a significant escalation in the geopolitical landscape.
Australia’s financial landscape, however, remained steady, supported by robust Crude oil prices and positive developments suggesting additional stimulus measures by the People’s Bank of China (PBoC). The Reserve Bank of Australia’s (RBA) Bulletin reflected business expectations of a moderation in price growth over the past six months, though remaining above the RBA’s inflation target range of 2.0–3.0%. Anticipations of a later-year reduction in borrowing costs by the RBA added a layer of complexity to the currency‘s trajectory.
Investor attention turns to upcoming economic indicators, with Tuesday’s Australian Retail Sales figures expected to show a decline of 0.7%, contrasting the previous increase of 2.0%. Additionally, Wednesday’s release of Consumer Price Index (CPI) data is poised to influence market sentiment.
The US Dollar Index (DXY) found support in improved US Treasury bond yields, posing a potential challenge to the AUD/USD pair’s advances. Friday’s data on the US Core Personal Consumption Expenditures Price Index (PCE) for December revealed a monthly increase of 0.2%, meeting expectations but falling short of the yearly target of 3.0%.
Looking ahead, the Federal Open Market Committee (FOMC) statement on Wednesday, January 31, carries significance, with market consensus anticipating an unchanged Fed Funds rate at 5.25-5.50%. However, the prevailing market bias toward a potential rate cut in March could weigh on the USD. Tuesday’s Housing Price Index and Consumer Confidence figures are additional focal points for market observers.
In other developments, positive signs emanated from Australia’s economic front, with an increase in the Manufacturing PMI to 50.3 and improvements in the Services PMI and Composite PMI, showcasing overall growth.
Chinese financial media reported potential monetary policy adjustments, including a Medium-term Lending Facility (MLF) rate cut by the People’s Bank of China (PBoC) in the current quarter. This aligns with earlier statements by PBoC Governor Pan Gongsheng, signaling a reduction in the Required Reserve Ratio (RRR).
US Treasury Secretary Janet Louise Yellen expressed optimism regarding the robust performance of the US economy in the fourth quarter, downplaying concerns about inflation. Positive economic indicators, such as the US Gross Domestic Product Annualized (Q4) reading of 3.3%, exceeded market consensus.
In technical analysis, the Australian Dollar faces initial resistance around the psychological level of 0.6600, coinciding with the 23.6% Fibonacci retracement and the 14-day Exponential Moving Average (EMA) at 0.6606 and 0.6610, respectively. A breakthrough could propel the AUD/USD pair towards the key barrier at 0.6650. Conversely, downside movement may lead to a revisit of the previous week’s low at 0.6551, with additional support at 0.6550 and the monthly low at 0.6524. The currency’s movement remains a focal point amid ongoing geopolitical developments and economic data releases.