Australian Dollar falls ahead of Fed
- Aussie drops near 0.6340 as sentiment sours before Fed decision.
- Fed expected to slow the pace of 2025 rate cuts.
- Weak Australian consumer sentiment fuels RBA dovish bets.
- Despite USD softness, AUD struggles amid cautious markets.
The Australian Dollar falls sharply to near 0.6340 amid a cautious market mood ahead of the Federal Reserve’s policy announcement. The Fed is anticipated to hint at fewer interest rate cuts for 2025, weighing on risk appetite. Soft Australian consumer sentiment has bolstered expectations of a dovish Reserve Bank of Australia move in February, keeping the Aussie under pressure despite some recent USD weakness.
Daily digest market movers: Aussie slips as markets eye Fed pivot and soft Australian sentiment
- According to the CME FedWatch tool, traders price in a 25 basis points rate cut on Wednesday, but lean toward a pause in January 2025.
- The US Dollar Index (DXY) rises above 107.00 as risk-off mood prevails; S&P500 futures trade lower, signaling cautious sentiment.
- November’s US Retail Sales growth of 0.7% beat forecasts, but mixed revisions and weaker ex-Cars data tempered USD optimism.
- Industrial Production contracted by 0.1% in November, missing the 0.3% expansion consensus, underscoring uneven US growth.
- US 10-year Treasury yields pull back from 4.43%, last seen near 4.38%, reflecting lingering uncertainty before the Fed’s decision.
- Australian Westpac Consumer Confidence fell 2% in December after a 5.3% rise in November, raising doubts over the domestic outlook.
- Concerns over China’s growth, due to incoming US tariffs, further weigh on the Aussie as Australia is a key Chinese trading partner.
AUD/USD technical outlook: Aussie nears oversold territory as bearish momentum builds
The AUD/USD pair declined by 0.42% to 0.6350 on Tuesday, extending its losing streak. The Relative Strength Index (RSI) hovers around oversold levels and is declining sharply. The Moving Average Convergence Divergence (MACD) histogram prints decreasing red bars, reinforcing the bearish narrative. While the pair struggles to hold ground, indicators flirting with oversold conditions may eventually trigger a corrective rebound. However, traders await the Fed’s guidance and fresh economic data before placing directional bets.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.