AUD/USD consolidates break above US$0.70 as eyes turn to CPI update

Daily currency update

The Australian dollar consolidated a break above US$0.70 through trade on Tuesday, staving off attempts to break below the psychological handle and marking intraday highs at US$0.7055. Having bounced between US$0.7020 and US$0.7040 through much of the domestic session, the AUD tracked toward intraday lows at US$0.6995 as investors looked to take stock and reassess positions after a significant surge in risk demand over the past few days. The downturn, however, did not last long, with markets unwinding intraday moves following weaker-than-anticipated US PMI activity. The downturn across key US service sectors and reports of labour market uncertainty helped drive an AUD recovery. Attentions turn now to Domestic CPI data. Macro data sets suggest inflation pressures will remain sticky. While we don’t anticipate an upside surprise will move the RBA off, issuing a 25-point rate hike in February today’s print will go a long way in shaping forward guidance and rate expectations through H1.

Key movers

Price action across major currencies was mixed through trade on Tuesday as markets reacted to various macroeconomic data points and a shift in the global rates backdrop. US PMI data lifted off November lows but still failed to rebound above 50, indicating activity across service sectors continues to contract. With cracks appearing in what has previously been a relatively robust labour market, fears of stagflation and recession continue to rise. Reports US giant 3M will cut its labour force by 2,500 workers following a sharp slowdown in December added to data revealing a significant downturn in temporary work with nearly 120,000 part-time or temporary employees losing their jobs in the last 5 months. All signs point to an economy in the throws of a marked slowdown, if not recession, and while a correction in risk appetite helped the US garner early gains, markets unwound the move and the USD remains under pressure. In other news, the euro maintained a relatively narrow trading handle buoyed by a better-than-anticipated PMI print. Activity across Europe’s service sector expanded through December, marking 6 months highs and offering a sharp point of contrast to the US. Having touched intraday lows at US$1.0835, the euro tested US$1.09 before tracking sideways into the open. The pound was the day’s worst performer giving up over 100 points following a downturn in services activity. PMI data showed activity contracted at its fastest pace in over a year as reports emerge of growing problems plaguing the UK service sector and labour force. Having broken above US$1.24, the pound plunged through US$1.23 to mark intraday lows at US$1.2275 before finding support and limping back toward US$1.2320. Our attention focuses on the Bank of Canada today. While a 25-point rate hike is priced, the bank is nearing the end of its tightening cycle, and we anticipate some adjustments to forward guidance that could shape near-term CAD direction. Please note there will be no commentary tomorrow. We will return on Friday after the public holiday.

Expected ranges

• AUD/USD: 0.6880 – 0.7120 ▲
• AUD/EUR: 0.6420 – 0.6520 ▲
• GBP/AUD: 1.7320 – 1.7680 ▼
• AUD/NZD: 1.0780 – 1.0880 ▲
• AUD/CAD: 0.9350 – 0.9450 ▲