The Effects of Inflation and PMI on AUD/USD Exchange Rate

The Effects of Inflation and PMI on AUD/USD Exchange Rate

The Australian dollar (AUD) has been experiencing fluctuations against the US dollar (USD) due to various factors, including inflation rate and private sector PMI numbers from China. This article will analyze the impact of these factors on the AUD/USD exchange rate and discuss potential future trends.

In the fourth quarter, the annual inflation rate in Australia eased from 5.4% to 4.1%, which was lower than economists’ forecast of 4.3%. This decrease in inflation rate eased bets on a rate hike by the Reserve Bank of Australia (RBA). The weaker-than-expected retail sales figures also contributed to the dampened expectations. As a result, the AUD/USD exchange rate experienced a slide, falling from $0.65953 to $0.65719.

Private sector PMI numbers from China also played a role in influencing investor sentiment towards the AUD/USD exchange rate. The NBS Non-Manufacturing PMI increased from 50.4 to 50.7 in January, while the Manufacturing PMI went up from 49.0 to 49.2. These figures were slightly below economists’ forecasts of 50.5 and 49.2, respectively. Despite the measures implemented by Beijing to boost economic activity, private sector activity remained lackluster at the beginning of the year. This further contributed to the decline in the AUD/USD exchange rate.

Investors also closely monitored the ADP employment numbers for January, with the anticipation that a larger-than-expected increase in employment could reduce bets on a potential rate cut by the Federal Reserve (Fed) in March. Economists predicted a 145k increase in employment, following a rise of 164k in December. The tight labor market conditions support wage growth and may increase disposable income, thus fueling consumer spending. Conversely, a higher-for-longer Fed rate path could reduce disposable income and curb consumer spending.

In addition to the employment numbers, other key factors include the employment cost and Chicago PMI numbers, as wage growth figures can heavily influence the AUD/USD exchange rate. Economists forecasted a 1.1% increase in employment cost wages quarter-on-quarter in Q4, compared to 1.2% in Q3.

However, the most significant factor impacting the AUD/USD exchange rate is the Fed interest rate decision, rate statement, and press conference. Economists predict that the Fed will leave interest rates at 5.50%. Investors must pay close attention to the rate statement and press conference to determine the anticipated timing of the first Fed interest rate cut. The uncertainty surrounding a potential rate cut in March remains after observing robust US economic indicators.

Despite the aforementioned factors, the AUD/USD exchange rate continues to follow a bearish trend. The AUD/USD currently sits below the 50-day and 200-day Exponential Moving Averages (EMAs), indicating bearish price signals. To reverse this trend, the AUD/USD would need to break above the 200-day EMA, which would support a move to the resistance level of $0.66162 and the 50-day EMA. However, selling pressure may intensify at the $0.66162 resistance level. Conversely, if the AUD/USD falls below the $0.65500 handle, it could decline further towards the support level of $0.64900.

To conclude, the AUD/USD exchange rate is influenced by various factors, including inflation rate, private sector PMI numbers from China, and employment data. The recent easing of the inflation rate and weaker PMI numbers have contributed to the decline in the AUD/USD exchange rate. Additionally, investor attention is focused on the upcoming Fed rate decisions and statements, as well as US labor market data. Technical analysis suggests a bearish trend for the AUD/USD, but future trends will heavily depend on these key factors.


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