06 Jan 2025

• The Australian Dollar holds gains following the PMI data release on Monday.
• The Caixin China Services PMI increased to 52.2 in December 2024, up from the previous reading of 51.5.
• The US Dollar Index hovers near 109.00, close to recent highs.
• The Australian Dollar (AUD) continues to strengthen for the third consecutive session against the US Dollar (USD) on Monday. The appreciation of AUD/USD is attributed to the support gained by the AUD following the publication of the Judo Bank Australia Purchasing Managers' Index (PMI) and the Caixin Services PMI for China, which is a significant trading partner.
  
  The Judo Bank Australia Composite PMI for December 2024 has been revised upward to 50.2 from the prior figure of 49.9, signifying a third month of slight growth in private sector output. This growth has been primarily fueled by the services sector, while manufacturing output has experienced ongoing contraction. Additionally, the Services PMI has been adjusted upward to 50.8, an increase from 50.5 in November, representing the eleventh consecutive month of expansion in the services sector.
• The Caixin China Services Purchasing Managers’ Index (PMI) increased to 52.2 in December 2024, rising from 51.5 in November and surpassing market expectations of 51.7. This represents the most rapid expansion in the services sector since May. Conversely, the Caixin Manufacturing PMI, released on Thursday, unexpectedly declined to 50.5 in December, down from 51.5 in November, falling short of market predictions of 51.7.
  
  As reported by Reuters, the Shanghai Stock Exchange has pledged to enhance the opening of capital markets during discussions with foreign institutions. The fundamentals of China's economy remain robust, showcasing resilience in a challenging global landscape. The Financial Times noted on Friday that the People's Bank of China (PBoC) is likely to implement an interest rate reduction at an appropriate moment this year. Due to their close trade ties, fluctuations in China's economy frequently exert a significant influence on Australian markets.

• Australian Dollar advances despite a stronger US Dollar amid Fed's hawkish policy shift

  The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against a basket of six major currencies, is currently hovering around the 109.00 mark. This level indicates a relatively strong performance of the USD in the global currency market, reflecting investor sentiment and economic conditions.
  
  In December, the US ISM Manufacturing Purchasing Managers' Index (PMI) showed a positive trend, rising to 49.3, which is an improvement from November's reading of 48.4. This increase not only signifies a slight recovery in manufacturing activity but also exceeded market expectations, which had anticipated a stagnant figure of 48.4. A PMI reading below 50 typically indicates contraction in the manufacturing sector, so this uptick, while still below the neutral mark, suggests that the sector may be stabilizing.
  
  On the monetary policy front, Richmond Fed President Thomas Barkin underscored the importance of maintaining a restrictive benchmark policy rate until there is greater confidence that inflation is moving towards the Federal Reserve's target of 2%. His comments reflect the Fed's cautious stance in navigating the complexities of inflation control while supporting economic growth.
  
  Additionally, Fed Governor Adriana Kugler and San Francisco Fed President Mary Daly acknowledged the challenging balancing act faced by US central bankers. They are tasked with slowing down the pace of monetary easing this year, a process that requires careful consideration of economic indicators and inflation trends.
  
  In the labor market, the US Initial Jobless Claims for the week ending December 27 came in lower than expected, with first-time claimants totaling 211,000. This figure was notably below the anticipated 222,000 and also lower than the previous week's count of 220,000, suggesting resilience in the job market despite broader economic uncertainties.
  
  Traders are currently exercising caution regarding the economic policies of President-elect Trump, particularly concerning potential tariffs that could increase the cost of living for consumers. This apprehension has been exacerbated by recent projections from the Federal Open Market Committee (FOMC), which indicated a likelihood of fewer rate cuts in 2025. Such projections reflect a careful approach by the Fed in light of persistent inflationary pressures that could impact economic stability.
  
  Moreover, rising geopolitical tensions, particularly in the Middle East and the ongoing conflict between Russia and Ukraine, are expected to bolster the USD, which is traditionally viewed as a safe-haven asset during times of uncertainty. Analysts at Action Economics have noted that the greenback has gained strength amid growing concerns about economic growth in other regions, further fueled by these geopolitical risks.
  
  The National Development and Reform Commission (NDRC) of China conveyed a positive outlook regarding the continuation of economic recovery in 2025. In a statement issued on Friday, the commission detailed its intentions to substantially increase funding via ultra-long treasury bonds to bolster "two new" initiatives, anticipating steady growth in consumption over the course of the year.

  Technical Analysis: Australian Dollar tests 14-day EMA ahead of 0.6250

  The AUD/USD pair trades near 0.6230 on Monday, maintaining a bearish outlook as it continues to move within a descending channel on the daily cart. However, the 14-day Relative Strength Index (RSI) climbs above the 30 level, indicating a potential weakening of bearish momentum, despite the ongoing downtrend.

  On the upside, the AUD/USD tests immediate resistance at the 14-day Exponential Moving Average (EMA) at 0.6243, followed by the descending channel’s upper boundary, around the psychological mark of 0.6300.

  Regarding its support, the AUD/USD pair could navigate the region around the lower boundary of the descending channel, around 0.6020.