18 Dec 2024

• The Australian Dollar declines amid market caution ahead of Fed policy decision.
• The Aussie Dollar receives downward pressure from the increased likelihood of the RBA delivering rate cuts sooner.
• US Federal Reserve is widely expected to deliver a 25 basis point rate cut on Wednesday.
• The Australian Dollar (AUD) continues to decline for the second consecutive session against the US Dollar (USD) on Wednesday. Market participants are preparing for a possible 25 basis point reduction in interest rates by the US Federal Reserve (Fed) later in the North American trading session.
  
  Additionally, the AUD is encountering difficulties as traders are raising their expectations that the Reserve Bank of Australia (RBA) will implement interest rate cuts earlier and more substantially than previously anticipated. Nonetheless, future policy decisions will be informed by data, with changing risk evaluations shaping the RBA's strategy.
• The US Dollar (USD) remains robust as market participants exercise caution in anticipation of the Federal Reserve's decision. The CME FedWatch tool indicates that the markets are nearly fully anticipating a 25 basis point reduction at the Fed's meeting in December. Furthermore, traders will pay close attention to Fed Chair Jerome Powell's press conference and the Summary of Economic Projections (dot-plot) following the meeting.
  
  On Tuesday, the US Census Bureau announced that US Retail Sales experienced a 0.7% month-over-month increase in November, surpassing the previous rise of 0.5%. In addition, the Retail Sales Control Group saw a 0.4% increase, recovering from the prior decline of 0.1%.

• Australian Dollar remains subdued amid market caution ahead of the Fed's decision

  National Australia Bank (NAB) continues to project that the first rate cut by the Reserve Bank of Australia will occur during the May 2025 meeting, although they recognize February as a potential alternative. According to NAB's report, the Unemployment Rate is anticipated to peak at 4.3% before declining to 4.2% by 2026 as the economy stabilizes. In terms of inflation, the trimmed mean inflation for Q4 is expected to be 0.6% on a quarter-on-quarter basis, with a gradual decrease anticipated, reaching 2.7% by the end of 2025.
  
  In December, Westpac's Consumer Confidence in Australia decreased by 2% to 92.8 points, reversing the positive trend observed over the previous two months, during which the index had risen by 5.3% in November. Traders are likely to focus on the upcoming US retail sales data for November, which is set to be released later in the North American trading session.
  
  According to Reuters, two sources reported that China aims to achieve an economic growth target of approximately 5% in 2025. This decision follows discussions among senior Chinese officials at the Central Economic Work Conference held last week. The growth target remains unchanged from this year, which China is expected to meet.
  
  The State Administration of Foreign Exchange (SAFE), China's foreign exchange regulator, disclosed a net outflow of $45.7 billion from the country's capital markets in November. Cross-border portfolio investment receipts amounted to $188.9 billion, while payments totaled $234.6 billion, resulting in the largest monthly deficit on record for this category.
  
  In the United States, the preliminary S&P Global Composite Purchasing Managers Index (PMI) increased to 56.6 in December, up from 54.9 previously. The Services PMI also improved, rising to 58.5 from 56.1. Conversely, the Manufacturing PMI fell to 48.3 in December, down from the earlier reading of 49.7.
  
  Chinese authorities, under the leadership of President Xi Jinping, have committed to raising the fiscal deficit target for the upcoming year, with a shift in policy focus towards consumption to stimulate the economy in light of impending 10% US tariffs that threaten exports. The absence of specific details regarding fiscal support has exerted downward pressure on the Australian dollar, given China's position as Australia's largest trading partner.

  Australian Dollar falls toward 0.6300 after breaking yearly lows

  AUD/USD is trading close to 0.6330 on Wednesday. An examination of the daily chart indicates a dominant bearish trend, as the pair remains within a descending channel formation. Furthermore, the 14-day Relative Strength Index (RSI) is positioned just above the 30 threshold, suggesting that bearish momentum continues to be present. A decline below the 30 level, however, would indicate an oversold condition, potentially paving the way for a corrective upward movement.
  
  On the downside, the AUD/USD pair has effectively breached the yearly low of 0.6348, which may exert additional downward pressure, leading it towards the lower boundary of the descending channel near the 0.6150 level.
  
  The AUD/USD pair is likely to encounter initial resistance at the nine-day Exponential Moving Average (EMA) situated at 0.6373, followed by the 14-day EMA at 0.6397, which coincides with the upper boundary of the descending channel. A significant breakout above this channel could propel the pair towards the eight-week high of 0.6687.