The Australian Dollar (AUD) has retreated after posting gains in the previous two sessions, despite the release of improved Australia Consumer Confidence data on Tuesday. The Westpac-Melbourne Institute Consumer Sentiment index surged 6.2% to 86 in February from 81 in January, marking its highest reading in 20 months. However, the index remained below the neutral 100 mark since February 2022.
The increase in consumer confidence could be seen as a positive sign for the Australian economy. However, analysts believe that the Australian Dollar faces downward pressure as Australian inflation moderates, leading to the market sentiment that the Reserve Bank of Australia (RBA) has completed its monetary tightening cycle. This downward trend in the Aussie Dollar weighs on the AUD/USD pair.
Additionally, the Australian money market’s decline may further constrain the AUD’s performance. With inflation expectations becoming muted, investors’ appetite for the Australian Dollar may decrease, resulting in a weaker exchange rate.
The US Dollar Index (DXY) is holding steady after recent gains, with the decline in US Treasury yields capping the strength of the US Dollar (USD). Market sentiment is mixed, as traders exercise caution ahead of the release of important US inflation data scheduled for Tuesday, which could influence expectations regarding interest rates.
While subdued US Treasury yields may limit the upside potential for the US Dollar, the currency has managed to maintain its ground. This can be attributed to investors’ wait-and-see approach as they anticipate the release of US CPI (Consumer Price Index) data. If the inflation figures come in as expected or higher, it could boost expectations of tighter monetary policy and support the US Dollar.
RBA’s Head of Economic Analysis, Marion Kohler, emphasized uncertainty regarding current inflation projections for the Australian economy. While she anticipates that price growth will eventually return to a more moderate level by 2025, there are concerns about the impact of global factors such as supply chain disruptions and rising energy prices.
The Commonwealth Bank of Australia (CBA) has also forecasted a reduction of 75 basis points in the benchmark interest rate for 2024, with the initial cut anticipated in September. This suggests that the central bank is prepared to take measures to stimulate inflation, which could put additional pressure on the Australian Dollar.
The Australian Dollar trades near 0.6520 on Tuesday, situated below the immediate resistance of the 14-day Exponential Moving Average (EMA) at 0.6544 aligned with the major barrier at 0.6550 level. A breakthrough above this major level could potentially prompt the AUD/USD pair to target key levels such as the 23.6% Fibonacci retracement level at 0.6563 and the psychological resistance at 0.6600.
On the downside, the psychological level of 0.6500 could act as immediate support. If the Australian Dollar breaks below this level, it could push the AUD/USD pair to revisit the previous week’s low at 0.6468 followed by the major support level of 0.6450.
The Australian Dollar is currently under pressure as the US Dollar holds its ground. Improved consumer confidence in Australia has been overshadowed by moderating inflation and expectations of a completed tightening cycle by the RBA. On the other hand, despite subdued US Treasury yields, the US Dollar has managed to remain steady as investors await important inflation data. Uncertainty surrounding Australia’s inflation projections and the possibility of interest rate cuts further weigh on the Australian Dollar’s outlook. Traders should closely monitor the key support and resistance levels for the AUD/USD pair to gauge future price movements.
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