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AUD/USD continued to decline after the Reserve Bank of Australia declared in their minutes meeting that the board thought policy would need to stay restrictive for the time being. However it did open the door to easing as early as February should data unfold as expected.
Weak Q3 growth for Australia might revive expectations of RBA cuts in 2025. The RBA cash rate futures curve has fully priced in 25bps to land in April, June and November.
The dovish tone contrasted with the Federal Reserve’s caution on further rate cuts and weighed on AUD/USD already burdened by risk aversion and worries about China’s economy. With the upcoming U.S. administration, Donald Trump will place tariffs on China (Source: FX Street) which may impact China’s exports especially with Australia being its largest trading partner.
Increased U.S. tariffs on Chinese goods could weaken Chinese demand for Australian exports, especially commodities like gold, silver and other resources, which are critical to Australia’s trade balance. The Australian Dollar also faced mounting risk aversion and growing concerns about China’s economic health, a crucial factor given that China is Australia’s largest trading partner.
On December 18, 2024, the Federal Reserve cut interest rates by 25bps, in line with market expectations. However, the Fed’s indication of only two additional rate cuts in 2025, down from the previously expected four, signaled a more cautious approach.
Persistent inflation remained a concern, with rates expected to remain above the Fed’s 2% target through 2025. The Fed’s efforts to strike a balance between reducing inflation and maintaining economic momentum highlighted the difficulties of the economic environment.
Economic data (GDP, labor market, PMI) from the U.S. continued to show strength which supported the U.S. Dollar against major currencies. If the U.S. economy continues to outperform with high interest rates and the RBA became more dovish, AUD/USD may be exposed to major downside risks.
Technical Analysis
Source: TradingView
Price continued to form new lows with all 3 EMAs adding more pressure to the price. Price touched its October 2022 low at 0.62.
RSI (14-Day) shows that the price is in oversold territory and might have a chance to rebound.
If bearish pressure continues on, price could continue its downtrend, with traders monitoring the 0.615 level as a new potential support. If price can pull back, bulls may look to rebound above 0.63 and might cause the price to rally.
