US Inflation and Market Impact
The upcoming US inflation report is a critical event for financial markets, closely monitored by traders and central banks. Despite the Federal Reserve’s resistance to the idea of multiple rate cuts, with Chair Jerome Powell dismissing a March rate hike and Raphael Bostic predicting a rate cut in the third quarter, the market has adjusted its expectations from anticipating over five cuts to just one or two. This adjustment has strengthened the US dollar and placed downward pressure on the AUD/USD currency pair. The persistence of this pressure hinges on whether US inflation decreases more rapidly, given the considerable distance to the Fed’s 2% target for CPI and core CPI.
Australian Employment Data and RBA Policy
Australia’s employment figures for January are under the spotlight after December witnessed a significant reduction in full-time jobs, marking the worst performance outside of a recession, aside from the pandemic period. This data will be crucial in determining whether December’s job losses were an anomaly or the start of a trend, potentially triggering recession fears. A continuation of job cuts, coupled with an increase in unemployment and a drop in the participation rate, may prompt market participants to anticipate more aggressive RBA rate cuts, thereby applying additional downward pressure on the AUD/USD.
RBA’s Economic Stance
The Reserve Bank of Australia (RBA) maintains a slightly hawkish stance, underscored by its decision to keep rates steady at 4.35% and a minor adjustment in its inflation forecast. Despite a weakening economy and softer inflation figures in Q4, the RBA’s stance is influenced by Australia’s previously robust employment data. However, the RBA’s chief economist is expected to align with this perspective in the upcoming speech, signaling no dovish shift in policy despite market speculation for potential rate cuts within the year.
Market Drivers and Business Confidence
Key events influencing the AUD/USD, AUD/JPY, and ASX 200 include remarks from Marion Kohler, Head of Economic Analysis at the RBA, and the NAB business confidence report. Business confidence in Australia has been on a decline, with December marking the third consecutive month of falling sentiment. This trend, combined with softening business conditions and easing input costs, suggests a slowing economic growth trajectory, potentially influencing the RBA to consider interest rate adjustments to counteract these trends.
AUD/USD Technical Outlook
The AUD/USD pair recently ended a five-week losing streak, hinting at a potential shift in market sentiment as indicated by a spinning top candlestick pattern. While there’s caution against premature short positions around current levels, the fundamental analysis suggests a complex interplay between the Fed’s reluctance to ease monetary policy and the RBA’s efforts to maintain a hawkish narrative. This dynamic, coupled with Australia’s economic slowdown, presents a nuanced strategy for trading this currency pair, emphasizing opportunities to capitalize on short-term rallies before a possible downward adjustment.
