Australian Dollar depreciates for the second straight session on weaker inflation data from Australia.

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• Australian Dollar depreciates for the second straight session on weaker inflation data from Australia.
• Australia’s Monthly CPI reported 3.4% in December, down from November’s 4.3%.
• Traders expect two rate cuts from the Reserve Bank of Australia in 2024.
• Chinese Non-Manufacturing and Manufacturing PMI improved to 50.7 and 49.2, respectively in January.
• Fed is expected to maintain interest rates at 5.5% for the fourth consecutive time.

The Australian Dollar (AUD) remains on a downtrend on Wednesday after Australian inflation slowed more than anticipated in the December quarter. This has led traders to factor in the possibility of as many as two rate cuts from the Reserve Bank of Australia (RBA) throughout the year. The prevailing risk-off sentiment is adding further downward pressure on the AUD/USD pair, as market participants exercise caution amid heightened tensions in the Middle East.

Australia’s Monthly Consumer Price Index (CPI) recorded a year-on-year increase of 3.4% in December, down from November’s 4.3% and below the anticipated 3.7%. The RBA Trimmed Mean CPI (YoY) for the fourth quarter stood at 4.2%, a decline from the 5.2% reported previously and also lower than the expected 4.3%. Meanwhile, the CPI (QoQ) figure came in at 0.6%, softer than the anticipated 0.8% and a notable decrease from the previous reading of 1.2%.

The Reserve Bank of Australia’s target range for inflation is 2.0% to 3.0%. Although the current figures are not within this target range, they represent a significant improvement compared to the peak CPI rate of close to 8.0%. The RBA’s policy meeting is scheduled on February 5 and 6, and it is widely expected that the interest rate decision will be to keep interest rates unchanged.

The China Federation of Logistics and Purchasing (CFLP) has released the monthly Non-Manufacturing Purchasing Managers’ Index (PMI), indicating an improvement in the performance of China’s service sector for January. The reading came in at 50.7, slightly surpassing the expected figure of 50.6. Concurrently, the Manufacturing PMI also demonstrated improvement, reaching 49.2, meeting the anticipated value and advancing from the previous reading of 49. These improved figures could help in limiting the losses of the Aussie Dollar, as given that Australia and China are close trade partners.

The US Dollar Index (DXY) faces a challenge due to the subdued United States (US) Treasury yields. The risk aversion sentiment could intensify as the administration of US President Joe Biden is anticipated to authorize military strikes in response to the recent drone attack on a US outpost in Jordan. Investors will eye on US ADP Employment Change on Wednesday ahead of the US Nonfarm Payrolls later this week.

The Federal Open Market Committee (FOMC) is widely expected to maintain interest rates in the range of 5.25–5.50% for the fourth consecutive time in Wednesday’s meeting. During the Federal Reserve’s (Fed) December meeting, officials foresaw three rate cuts in 2024. Investors are keenly awaiting signals from Fed Chairman Jerome Powell. Rate swap markets have witnessed a gradual extension of rate cut expectations, and the CME’s FedWatch Tool indicates a 43% probability of the first-rate cut from the Fed in March. In contrast, back in December, swaps initially implied over an 80% chance of a rate trim in March. Furthermore, there is a 53% chance of a 25 basis points rate cut in May.

The Australian Dollar trades around 0.6560 on Wednesday followed by the previous week’s low at 0.6551, aligning with the significant level at 0.6550. The pair could retest the monthly low at 0.6524 if this support is breached. On the upside, the AUD/USD pair could encounter initial resistance at the psychological level of 0.6600 aligned with the 23.6% Fibonacci retracement level at 0.6606. A breakthrough above the latter could lead the AUD/USD pair to test the 21-day Exponential Moving Average (EMA) at 0.6622 followed by the key resistance level at 0.6650.

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