AUD/USD Price Annual Forecast: Outlook brightens on Fed-RBA divergence expectations in 2024

• AUD/USD looks poised to end nearly unchanged for the year amid good two-way US Dollar price moves.
• Global central banks, geopolitics and China's economic conditions will remain key themes through 2024.
• A multi-year-old descending channel points to a well-established downtrend and warrants caution for bulls.

 

The Australian Dollar (AUD) started 2023 on a high note, though slumped closer to its post-pandemic low against the US Dollar (USD) during the latter part of the year. The currency clawed back some of its steep declines during the final two months of 2023, and the outlook seems sunnier in the wake of the prevalent bearish sentiment surrounding the Greenback.

AUD/USD price action in 2023

The AUD/USD pair peaked near the 0.7155-0.7160 region in February 2023 and dived around 700 pips by the end of May in the wake of expectations for more aggressive rate hikes by the Federal Reserve (Fed). Adding to this, Russia's invasion of Ukraine, the Reserve Bank of Australia's (RBA) rate-hike pause in April after 10 consecutive raises and concerns about a deeper global economic downturn, particularly in China, further contributed to the steep downfall.

The Fed, meanwhile, raised the benchmark overnight interest rate in May for the 10th consecutive increase since March 2022 but signalled that it could pause further hikes. This, along with the RBA's surprise 25 bps lift-off in May, assisted the AUD/USD pair to stage a recovery. The momentum, however, ran out of steam near the 0.7000 psychological mark on the back of worries about the worsening economic conditions in China – Australia's largest trading partner.

After a rapid spurt of activity earlier in 2023, a deepening crisis in the real estate sector – which accounts for about 25% of the economy – significantly hampered its growth. Adding to this, a slump in exports and falling consumer prices made the situation worse for the world's second-largest economy. Moreover, a lack of resolute measures to stimulate domestic demand and fears of contagion triggered a round of growth downgrades by several major investment banks to below 5%.

The subsequent slump was fuelled by the RBA's decision to maintain the status quo for four meetings in a row. This dragged the AUD/USD pair to the 0.6270 region, or a near one-year low in November. The downward trajectory was further sponsored by the relentless USD rally through the July-October period. The Fed's higher-for-longer interest rates narrative pushed the benchmark 10-year US Treasury yield beyond 5% for the first time in 16 years and benefitted the USD.

US job growth surged in September and suggested that the labor market remained strong enough for the Fed to stick to its hawkish stance, though moderating wage growth eased inflationary concerns. Furthermore, the Hamas militant group in Gaza, Palestine, attacked Israeli towns in an unprecedented move on October 7. This, in turn, pushed the Greenback to a fresh year-to-date peak in October.

The US bond yields and the Greenback started losing traction in November due to speculations that the Fed may be done raising interest rates. The pullback extended through the end of November amid rising bets that the US central bank may begin easing the policy early next year. This, along with the RBA’s relatively more hawkish tilt, assisted the AUD/USD pair to snap a three-month losing streak and extend the positive move through the latter part of December.

What’s up next for AUD/USD in 2024?

The Fed acknowledged that inflation had eased at the end of the December policy meeting and indicated that further rate increases might be off the table. Moreover, policymakers projected interest rates to fall to 4.6%, suggesting a cumulative 0.75 percentage points, or at least three 25 basis points (bps) rate cut in 2024. Apart from this, hopes that China will introduce more stimulus to boost consumer demand and economic growth pushed the AUD/USD pair back closer to the 0.6800 mark.

The RBA, on the other hand, also held interest rates steady at a 12-year high of 4.35% in December to assess the state of the economy and decide whether to tighten further next year. The data-dependent approach, however, keeps alive hopes for another rate hike if the Q4 inflation data, due in late January, overshoots expectations. Upside inflation risks, along with firmer economic activity and higher property prices, could bring the RBA back to the hiking table in February or May 2024.

Furthermore, expectations that growth in China will pick up due to the government's stimulus efforts could offer some support to antipodean currencies, including the Australian Dollar (AUD). For 2023, China’s GDP growth is expected to reach close to the 5.5% target amid an increase in consumer outlays, which rose by 6.8% during the first three quarters of the year compared with the same period a year earlier. New spending by private sector companies could support the Chinese economy in 2024.

Meanwhile, the US central bank has made it clear that it will not cut rates for the sake of cutting in the absence of any real evidence of an economic slowdown. In fact, the world’s largest economy expanded by a 4.9% annualized pace during the third quarter. The momentum is unlikely to fade anytime soon amid solid consumer spending, which accounts for more than two-thirds of US economic activity. US consumption has been surprisingly resilient despite over 500 bps of interest rate hikes since March 2022.

This raises expectations that the Fed will achieve a soft landing – slowing inflation without tipping the economy into recession. Hence, the current market pricing for a more aggressive policy easing by the central bank next year might have already set the stage for a disappointment and favours the USD bulls. This should allow the USD to resume the prior uptrend witnessed since July 2023 and keep a lid on a runaway rally for the AUD/USD pair.

Apart from this, the upcoming US Presidential election could also play a key role in influencing the USD price dynamics and driving the AUD/USD pair. Historically, equity markets tend to perform poorly in the months heading into elections, but then stage sharp relief rallies after the key event risk has passed. This could dent the Greenback’s relative safe-haven status, though the subsequent market reaction will boil down to how the election results affect the trajectory of Fed policy.

This suggests that central banks will continue to dominate the agenda through 2024 and infuse volatility in the Foreign Exchange market.

AUD/USD 2024 Technical Outlook

Looking at the longer-term chart, the AUD/USD pair has been drifting lower along a downward-sloping channel since February 2022. This points to a well-established downtrend. The top boundary of the said channel, currently pegged near the 0.6870-0.6880 region, coincides with the 38.2% Fibonacci retracement level of the February 2021-October 2022 downfall. This should act as a key pivotal point. With oscillators on weekly and monthly charts holding in the positive territory, a sustained strength beyond will negate any near-term bearish outlook.

The subsequent move up has the potential to lift the AUD/USD pair beyond the 0.7000 psychological mark, or the 200-week Simple Moving Average (SMA), towards testing the 50% Fibonacci level, just ahead of the 0.7100 round figure. Some follow-through buying beyond the 0.7155-0.7160 area, or the 2023 peak, will be seen as a fresh trigger for bullish traders and pave the way for a further appreciating move. Spot prices might then surpass the 0.7200 mark and extend the momentum towards the 0.7300 mark, which represents the 61.8% Fibonacci level and might cap any further gains.

Meanwhile, rejection near the aforementioned confluence will reinforce the bearish trend channel resistance and drag the AUD/USD pair to the 0.6600 mark. The next relevant support is pegged near the 0.6500 psychological mark, which if broken decisively could expose the 0.6360-0.6355 horizontal support before spot prices eventually drop below the 0.6300 mark and challenge the 2023 through near the 0.6270 area. The downward trajectory could get extended further towards the 2022 low, around the 0.6170 region, en route to the 0.6000 psychological mark.

AUD/USD Weekly Chart