AUD/USD wavers as risk appetite falters

Daily currency update

The Australian dollar enjoyed varied fortunes through trade on Tuesday tumbling below key supports before recovering losses to open in much the same position. A tempering in risk demand had forced the AUD below US$0.71 a trend that continued through the Australasian session as softer than anticipated domestic retail sales prompted a correction across Australian short-term rates. Consumer spending fell sharply in December, down almost 4% raising concerns rising cost of living pressures and monetary policy tightening is starting to dampen economic growth prospects. Despite a bounce in Chinese PMI data, particularly across the service sectors risk appetite soured forcing the AUD toward intraday lows below US$0.70. Having touched sessions lows just south of US$0.6990 the AUD found support after US wage data fell further than anticipated. The US Employment Cost Index suggest wage inflation pressures have eased and indicate wage growth has peaked. The reduction in wage pressures is welcome news to the Fed and while to high acts as another indicator broader inflation challenges are abating. Sustained softening of inflation pressures has elevated expectations the Fed may pause future rate hikes, helping elevate risk demand through the overnight session and push the AUD back above US$0.7050. Our attentions turn now to US ADP Non-farm employment data, manufacturing PMI and Job Openings while euro area CPI estimates and manufacturing PMI’s dominant the European docket. With critical central bank policy announcements due Thursday today’s data sets could prompt a last-minute change in expectations.

Key movers

Price action across major currencies was mixed through trade on Tuesday with little net change in underlying rates as risk appetite continues to waiver. The US dollar edged lower on the day following a larger than anticipated decline in wage inflation. While still elevated at an annualised rate of 4% the decline is welcome news for the Fed working to control price pressures. With underlying inflation peaking and the labour market softening expectations the Fed may pause its rate tightening cycle in April continue to gather steam. After a brief downturn the euro moved to extend gains pushing above €1.0850 while the yen pushed the USD back below ¥130 amid a softer global rates backdrop. Our attentions turn now to a slew of manufacturing PMI data out of Europe and the US, while US ADP non-farm payroll numbers and job openings will provide a last minute health check on the labour market ahead of tonight’s all important Fed policy update.

Expected ranges

• AUD/USD: 0.6920 – 0.7150 ▼
• AUD/EUR: 0.6450 – 0.6550 ▼
• GBP/AUD: 1.7280 – 1.7680 ▲
• AUD/NZD: 1.0850 – 1.0950 ▼
• AUD/CAD: 0.9350 – 0.9450 ▼