The Commonwealth Bank of Australia (CBA) has recently released its predictions regarding the Reserve Bank of Australia’s (RBA) interest rate cuts. According to CBA’s chief economist, the RBA is expected to reduce interest rates from 4.35% to 3.6% by the end of 2024. The chief economist also predicts that the RBA will initiate these rate cuts in the fourth quarter of 2024. This forecast has significant implications for the value of the Australian dollar (AUD) and will largely depend on various economic indicators and their impact on the RBA’s decision-making process.
The RBA has expressed concerns about household spending and the possibility of increased wages. If wage growth shows an uptrend, it could potentially lead to higher consumer spending and demand-driven inflationary pressures. In response, the RBA may choose to maintain higher interest rates for a longer period. This approach aims to curb spending and dampen inflation.
On Thursday, markets will closely monitor the US labor market and housing sector numbers. Economists predict a slight increase in initial jobless claims and anticipate a 1.0% rise in pending home sales for November. Tight labor market conditions are supportive of wage growth and can lead to higher disposable income. Consequently, increased consumer spending may fuel demand-driven inflation. The Federal Reserve (Fed) might consider delaying interest rate hikes as a countermeasure.
Furthermore, improvements in the housing sector can also contribute to increased spending. This development may force the Fed to reconsider its projected rate path. However, softer inflation numbers have fueled speculation about a potential Fed rate cut in the first quarter of 2024. The CME FedWatch Tool indicates a 74.5% probability of a 25-basis point rate cut in March. This probability was at 70.1% on December 26. Meanwhile, the chances of a rate cut in January are rising, currently standing at 18.6% according to the CME.
The near-term trends for the AUD will heavily depend on economic indicators from China and the US economic calendar. Downward surprises in US numbers and a stabilizing Chinese economy would likely support the AUD/USD returning to the $0.70 mark. As of now, the AUD/USD is comfortably positioned above both the 50-day and 200-day Exponential Moving Averages (EMA). This alignment reinforces bullish price signals and suggests the potential for further upside.
A break above the $0.68500 handle would provide additional confirmation and pave the way for a move towards the $0.68944 resistance level. However, market risk sentiment and the US economic calendar will play significant roles in determining the overall demand for the AUD/USD on Thursday. Conversely, if the AUD/USD drops below the $0.68096 support level, it could open the door for bears to test the $0.67286 support level.
The 14-period Daily Relative Strength Index (RSI) reading of 71.97 indicates that the AUD/USD is currently in overbought territory. Historically, an RSI reading above 70 typically suggests the potential for selling pressure to increase. Therefore, caution should be exercised when approaching the $0.68944 resistance level.
The RBA’s interest rate cut predictions and the impact of various economic indicators remain crucial to Australia’s economic outlook. The AUD’s performance will undoubtedly be influenced by the interplay between Chinese and US economic indicators, as well as market risk sentiment. Keep an eye on developments in the US labor market, housing sector, and inflationary pressures, as they will greatly shape the RBA’s decisions and the future direction of the AUD.
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