The Australian Dollar (AUD) experienced a slight decline on Tuesday, largely influenced by the continued strength of the US Dollar (USD), buoyed by robust US jobs data for May. This development has tempered expectations of potential Federal Reserve (Fed) interest rate cuts in 2024. According to the CME FedWatch Tool, the probability of a Fed rate cut in September by at least 25 basis points has decreased to approximately 49.0%, down from 59.5% recorded a week earlier.
However, the downside for the Australian Dollar may find some limitation as traders anticipate the Reserve Bank of Australia (RBA) to maintain higher rates throughout the year. RBA Governor Michele Bullock recently indicated the central bank‘s readiness to hike interest rates if the Consumer Price Index (CPI) fails to return to the target range of 1%-3%, as reported by NCA NewsWire.
Despite two consecutive days of declining US Treasury yields, the US Dollar (USD) retains its strength as investors exercise caution ahead of the Federal Reserve’s policy decision and crucial US inflation data scheduled for Wednesday. The Fed is expected to maintain interest rates within the range of 5.25%-5.50%, aiming to mitigate inflation towards its 2% target. Forecasts for US headline and core Consumer Price Index (CPI) figures for May suggest year-over-year increases of 3.4% and 3.5%, respectively.
In the realm of economic indicators, Australia’s NAB Business Confidence index dipped to -3 index points in May, marking its lowest level in six months and turning negative for the first time since last November. Additionally, Business Conditions fell to 6 index points, slightly below the long-run average. NAB’s Chief Economist Alan Oster emphasized caution regarding the outlook for growth and inflation, anticipating the RBA to maintain rates amid contrasting risks.
Rabobank’s report suggests the possibility of Fed rate cuts in September and December, primarily driven by concerns over a deteriorating economy rather than progress on inflation. This perspective is rooted in the belief that the US economy is transitioning into a stagflationary phase characterized by persistent inflation and an impending economic slowdown, potentially culminating in a mild recession later this year.
Technical analysis reveals that the Australian Dollar has dipped below 0.6600 against the US Dollar, indicating a weakening bullish bias for the AUD/USD pair. The breach below the lower boundary of an ascending channel pattern is corroborated by the 14-day Relative Strength Index (RSI), which hovers slightly below the 50 level.
Key support levels are identified at 0.6550 and 0.6500, with a break below the latter potentially exerting downward pressure on the AUD/USD pair towards the throwback support at 0.6470. Conversely, the 21-day Exponential Moving Average (EMA) at 0.6625 serves as a significant resistance, along with the lower boundary of the ascending channel around 0.6635. A resurgence within the ascending channel pattern could reinforce the bullish sentiment, prompting the AUD/USD pair to target the psychological level of 0.6700, followed by May’s high of 0.6714.
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