AUD/USD rally runs out of steam ahead of 0.7250, still up substantially on the week

Since rebounding from the 0.7200 level during Asia Pacific trade, AUD/USD has advanced, though in recent hours, has been going sideways in the 0.7230s area, after running into resistance ahead of the 0.7250 mark. At current levels, the pair trades higher by about 0.3% on the session, taking its on-the-week gains to about 1.6%. That’s an impressive move higher given that the final week before Christmas is typically characterised by low volumes and volatility.

A pick-up in optimism that the Omicron variant won’t derail the global economic recovery amid indications it is significantly milder than Delta and the approval of two new pills in the US for at-home Covid-19 infection treatment have been the main factors driving risk appetite and helping to drive the Aussie higher this week. Iron ore prices have also been rising in China (a major Australian export) in recent weeks as Chinese authorities take steps to support the slowing economy there, which should support Australia's balance of payments going forward.

But many FX strategists and analysts suspect that the weakness seen in the US dollar this week (mostly due to risk-on) is set to be short-lived. According to analysts at MUFG, “while the recent improvement in risk sentiment on the back of reduced Omicron fears is currently weighing on the U.S. dollar, we expect the correction lower to prove shortlived”. “Hawkish comments from Fed officials over the past week including from Fed Governor Waller and San Francisco Fed President Daly have signalled that they are considering raising rates as soon as the March FOMC meeting” the bank noted.

Thursday’s hotter than expected November Core PCE inflation numbers, coupled with strong weekly jobless claims data (which shows how tight the labour market is), strong November Durable Goods Orders and strong December Consumer Confidence all point to a US economy with excellent underlying momentum. The fact that the DXY, though lower on the week, continues to trade comfortably within its December ranges and remains on course for substantial on-the-year gains of nearly 7.0% suggests that, from a technical perspective, long-term bullish momentum remains solid. In the absence of a hawkish pivot from the RBA, Fed hawkishness amid a hot economy could see AUD/USD slip back towards December lows in the 0.7000 next January.