AUD/USD rally pauses around 67 US cents

Daily currency update

The Australian dollar is weaker this morning when valued against the Greenback amidst a dampened market sentiment as an economic slowdown looms. This came after a slew of central banks featuring the US Federal Reserve (Fed), the Bank of England (BoE), and the European Central Bank (ECB) raising rates by 50 bps each. Additionally, policymakers emphasized the need to do what’s needed to tackle inflation, which keeps investors uneasy. Earlier this month we saw the Reserve Bank of Australia (RBA) hike rates again by 25bp in the December meeting. While RBA signaled that rate hikes would continue in 2023, markets are pricing around 50% probability of a pause in the hiking cycle amid a weakening economy and especially the housing market. This morning at the time of writing the AUD/USD pair is trading around the 67 US cent mark at 0.6703. Last Friday we saw the release of Flash Manufacturing PMI. Australian private sector output shrank for a third successive month in December, according to Flash PMI data. Weaker demand for Australian goods and services underpinned the decline in activity. Also as a result of the fall in new orders, employment expanded at a slower rate while business optimism stayed muted. Input cost inflation eased but selling prices continued to rise rapidly. Looking ahead this week and on Tuesday we will see the release of the Reserve Bank of Australia (RBA) Monetary Policy Meeting Minutes a detailed record of the RBA Reserve Bank Board’s most recent meeting, providing in-depth insights into the economic conditions that influenced their decision on where to set interest rates. On Wednesday the Melbourne Institute will release the monthly Leading Index which is designed to predict the direction of the economy. Finally, on Friday the Australian Treasury Department will release the Mid-Year Economic and Fiscal Outlook which compares the government’s fiscal performance to the strategy outlined in the prior Annual Budget.

Key movers

On Friday the Great British Pound struggled to capitalize on its modest intraday bounce from the 1.2120 after a dovish outcome from the Bank of England meeting on Thursday, with two MPC members voting to keep interest rates unchanged, undermines the GBP, which is further pressured by the disappointing UK macro data. The UK Office for National Statistics reported that domestic Retail Sales fell 0.4% in November and were down 5.9% YoY. Furthermore, sales excluding volatile auto and fuel dropped by 0.3% during the reported month, missing consensus estimates. The data fuels concerns that the economy has entered a prolonged recession and favours the GBP/USD bears. In the United States on Friday S&P Global Services PMI declined to 44.4 in December’s flash estimate from 46.2 in November. This print fell short of the market expectation of 46.8. Regarding the price pressure in the service sector, inflationary pressures in the service sector cooled notably in December, as input costs rose at the softest pace since October 2020. Further details of the publication revealed that the Composite PMI dropped to 44.5 from 46.4 in the same period. The US Dollar came under modest selling pressure on this report and the US Dollar Index was last seen posting small daily losses at 104.42. Off the back of the weaker-than-expected data US equities finished lower the S&P500 falling 1.1% and the NASDAQ down 1% with investors wary of the likely hit to corporate earnings if the economy slumps into a recession next year, as seems likely.

Expected ranges

• AUD/USD: 0.6600 – 0.6800 ▼
• AUD/EUR: 0.6200 – 0.6400 ▼
• GBP/AUD: 1.8000 – 1.8200 ▲
• AUD/NZD: 1.0400 – 1.0600 ▼
• AUD/CAD: 0.9050 – 0.9250 ▼