Understanding the Factors Affecting the AUD/USD Exchange Rate

Understanding the Factors Affecting the AUD/USD Exchange Rate

The AUD/USD exchange rate experienced a decline of 0.30% on Thursday, following a slight gain of 0.33% the day before. This indicates a volatile trading session for the Australian dollar, as it ended the day at $0.68261. Throughout the session, the AUD/USD reached a high of $0.68710 before dropping to a low of $0.68242.

Several US economic indicators released on Thursday showcased the resilience of the US economy, thereby influencing the AUD/USD exchange rate. However, despite the positive indicators, the monetary policy divergence leans towards favoring the Australian dollar. This can be attributed to the final monetary policy decisions made in 2023, which indicated the possibility of an AUD/USD return to the $0.68 handle. In contrast to the Federal Reserve’s policy pivot, the Reserve Bank of Australia (RBA) is considering raising interest rates to combat inflation.

Key areas of concern for the RBA include wage growth, consumer spending, and the impact on demand-driven inflation. The RBA has highlighted the need for wage growth and expressed uncertainties regarding household spending. Looking ahead, there are no major economic indicators scheduled to be released from Australia on Friday. Investors will have to wait until the New Year to gauge the RBA’s likely rate path for the first quarter of 2024.

On the other hand, the spotlight will be on the US economy on Friday, following softer data from Thursday. The Chicago PMI (Purchasing Managers’ Index) numbers for December are expected to garner significant investor interest. Private sector data from Richmond and Dallas earlier in the week had sent mixed signals, so a marked fall in the Chicago PMI could further test expectations of a soft landing for the US economy. Economists forecast that the Chicago PMI could fall from 55.8 to 51.0, and a decline below 50 would signify contraction across the manufacturing and non-manufacturing sectors in the Chicago region.

It is important to note that the Chicago PMI is considered a leading indicator for the ISM (Institute for Supply Management) survey-based PMIs. Therefore, investors should carefully monitor Fed commentary, particularly with regards to inflation, the US economy, and interest rates. The near-term trends of the AUD/USD exchange rate will heavily rely on bets on the Fed’s policy pivot and expectations of the RBA maintaining interest rates unchanged in the first half of 2024.

The divergence in monetary policies between Australia and the US could continue to favor the Australian dollar, depending on economic indicators from both countries. If the Chicago PMI numbers turn out weaker than expected, it may raise the likelihood of a January rate cut by the Federal Reserve. This could potentially lead to a decline in the AUD/USD exchange rate.

From a technical analysis perspective, the AUD/USD remained above both the 50-day and 200-day Exponential Moving Averages (EMAs), which signals a bullish trend. If the exchange rate breaks above the Thursday high of $0.68710, it could trigger a move towards the resistance level at $0.68944. On the other hand, if the rate falls below the support level at $0.68096, it could pave the way for a decline towards the $0.67286 support level. Additionally, the 14-period Daily Relative Strength Index (RSI) reading of 68.29 suggests a short-term return of the AUD/USD to the Thursday high before potentially entering overbought territory.

Looking at the 4-Hourly RSI, which currently stands at 53.58, it indicates a possible move towards the resistance level at $0.68944 before potentially entering overbought territory.

Several factors are influencing the AUD/USD exchange rate. The resilience of the US economy, combined with the monetary policy divergence between the US and Australia, has created an interesting market dynamic. Economic indicators from both countries, particularly the Chicago PMI numbers, will play a significant role in shaping the near-term trends of the AUD/USD exchange rate. Technical analysis suggests a bullish trend, but market sentiment and future developments will ultimately drive the exchange rate. As always, investors should closely monitor economic indicators, central bank policy decisions, and any other relevant factors that may impact the AUD/USD exchange rate.

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