Australian Dollar remains resilient as the US Dollar weakens ahead of Trump’s inauguration
20 Jan 2025
The Australian Dollar strengthens even as a sense of caution prevails in anticipation of President-elect Donald Trump’s inauguration on Monday.
The People's Bank of China has kept its one- and five-year Loan Prime Rates unchanged at 3.10% and 3.60%, respectively.
Traders are exercising caution due to the uncertainty related to Trump’s policy commitments, which include the potential implementation of tariffs, the extension of tax cuts, and the deportation of undocumented immigrants.
The Australian Dollar (AUD) has ended its two-day decline against the US Dollar (USD) on Monday, buoyed by an increase in metals prices. Nevertheless, the potential for further gains in the AUD/USD pair may be limited, as the US Dollar (USD) is likely to strengthen due to market apprehension ahead of President-elect Donald Trump’s inauguration later in the day. It is important to note that the US market will be closed on Monday in observance of Martin Luther King Jr. Day.
On the same day, the People’s Bank of China (PBOC) declared that it would maintain its Loan Prime Rates (LPRs) at their current levels. The one-year LPR remains at 3.10%, while the five-year LPR is set at 3.60%. Given the close trading relationship between China and Australia, any changes in China's economic landscape could significantly influence Australian markets.
Additionally, the AUD benefited from positive economic indicators from China. In the fourth quarter of 2024, China’s Gross Domestic Product (GDP) experienced a year-on-year growth of 5.4%, following a 4.6% increase in the third quarter. This data surpassed market expectations of 5% for the period. Furthermore, December's annual Retail Sales rose by 3.7%, exceeding the anticipated 3.5% and the previous 3.0%. Industrial Production also outperformed forecasts, registering a growth of 6.2% compared to the expected 5.4% and November’s 5.4%.
The Australian Dollar may encounter difficulties as market anticipations increase regarding the potential for the Reserve Bank of Australia (RBA) to initiate interest rate cuts as soon as next month. Market participants are now turning their attention to the upcoming quarterly inflation report from Australia, scheduled for release next week, seeking insights into the prospective trajectory of interest rates.
Australian Dollar could face headwinds due to rising concerns over Trump’s policy pledges
The US Dollar Index (DXY), which assesses the performance of the USD against six prominent currencies, is currently positioned around 109.30. The Greenback has found support as US Treasury yields have increased, influenced by apprehensions regarding Trump's policy commitments, which include the implementation of tariffs, the extension of tax cuts, and the deportation of undocumented immigrants. Analysts suggest that the trajectory of future interest rates set by the US Federal Reserve (Fed) will be contingent upon the extent to which the Trump administration pursues these initiatives.
Investors are expected to closely monitor Trump's forthcoming executive orders, anticipated to be released shortly after his inauguration. In the meantime, the Fed is largely expected to maintain its current interest rates during its January meeting, with a significant number of economists surveyed by Reuters predicting a potential resumption of rate hikes in March.
Rising expectations that the Fed may reduce interest rates twice this year have led to a decline in US Treasury bond yields, with the 2-year and 10-year notes currently yielding 4.23% and 4.60%, respectively. Both yields are on track for a weekly decrease exceeding 3%.
In December, US Retail Sales experienced a month-over-month increase of 0.4%, totaling $729.2 billion. This figure fell short of market expectations, which anticipated a 0.6% rise, and was also lower than the previous month's increase of 0.8% (revised from an initial 0.7%).
On Thursday, Austan Goolsbee, President of the Chicago Federal Reserve Bank, expressed growing confidence over recent months that the job market is stabilizing at a level akin to full employment, rather than deteriorating further, as reported by Reuters.
Scott Bessent, the nominee for Treasury Secretary by Donald Trump, highlighted the critical need to preserve the US Dollar as the global reserve currency to ensure the nation's economic stability and future growth. Bessent remarked that “Productive investment that grows the economy must be prioritized over wasteful spending that drives inflation,” according to Bloomberg.
The Federal Reserve's latest Beige Book survey, published last week, indicated that economic activity experienced slight to moderate growth across the twelve Federal Reserve Districts during late November and December. Consumer spending saw moderate increases, bolstered by robust holiday sales that exceeded expectations. Conversely, manufacturing activity faced a slight overall decline, as some manufacturers opted to build up inventories in anticipation of potential higher tariffs.
Technical Analysis: Australian Dollar holds ground above 0.6200 support near 14-day EMA
The AUD/USD pair trades near 0.6210 on Monday, attempting to break above the descending channel on the daily chart. A successful breakout would weaken the prevailing bearish bias. However, the 14-day Relative Strength Index (RSI) remains below the 50 level, signaling bearish bias is still intact.
The initial support is seen at the nine-day Exponential Moving Average (EMA) at 0.6202. A more substantial support level is located near the recent low at 0.6131 level. A break below this level could lead the AUD/USD pair to navigate the region around the lower boundary of the descending channel, around the 0.5900 mark.
On the upside, the AUD/USD pair encounters immediate resistance at the 14-day EMA at 0.6210, aligned with the upper boundary of the descending channel.
