The Australian Dollar has been trading in a narrow range against the US Dollar as the market awaits key economic data and central bank decisions. The US Dollar has been losing ground amid rising Treasury yields and geopolitical tensions in the Middle East. Will AUD/USD break out of its consolidation and resume its rally?
Australian Dollar Supported by Strong Jobs Data and China Reopening
The Australian Dollar has been finding some support from the domestic front, as the latest jobs data showed a robust labour market performance in September. The unemployment rate fell to 3.7%, the lowest level since 2008, while the economy added 32.6k jobs, beating expectations of 15k. The full-time employment rose by 39.3k, while the part-time employment declined by 6.7k. The participation rate also edged down slightly to 66.8% from 66.9%.
The strong jobs data suggests that the Australian economy is coping well with the impact of the Covid-19 pandemic and the lockdowns in some states. The Reserve Bank of Australia (RBA) has maintained its accommodative monetary policy stance, keeping the cash rate at 4.1% and continuing its bond-buying program. However, the RBA has also signaled that it will review its policy settings in February, depending on the inflation outlook.
The inflation data for the third quarter will be released on October 25th, and it is expected to show a moderation in price pressures from the previous quarter. A Bloomberg survey of economists forecasts the headline CPI to ease to 6.2% year-on-year from 7.0%, while the trimmed mean CPI, the RBA’s preferred measure, to also slow down to 6.2% from 6.6%. The RBA’s inflation target is between 2% and 3% on average over time.
Another factor that has been supporting the Australian Dollar is the reopening of China, Australia’s largest trading partner and a major consumer of its commodities. China has shifted its Covid-19 policy in December, easing some of the restrictions and allowing more economic activity to resume. This has boosted the demand for base metals such as iron ore, copper, aluminium and nickel, which are among Australia’s top exports.
US Dollar Under Pressure from Rising Treasury Yields and Geopolitical Risks
The US Dollar, on the other hand, has been facing some headwinds from the rising Treasury yields and the geopolitical risks in the Middle East. The benchmark 10-year Treasury yield has climbed above 4.60%, near its 16-year high of 4.88% reached earlier this month, while the 2-year yield has also risen above 5%, the highest level since 2006.
The higher yields reflect the expectations that the Federal Reserve will tighten its monetary policy sooner than later, as the US economy shows signs of strength and inflation remains elevated. The Fed has already announced that it will start tapering its asset purchases in November, reducing them by $15 billion per month until they end by mid-2023.
However, the Fed has also stressed that tapering is not a prelude to raising interest rates, and that it will depend on the progress of the labour market and inflation. The Fed’s dot plot projections show that most policymakers expect at least one rate hike in 2023, while some see as many as three hikes.
The market will be closely watching the US inflation data for September, which will be released on October 14th, ahead of the next Fed meeting on November 2-3. A Bloomberg survey of economists predicts that the headline CPI will ease to 5.3% year-on-year from 5.4%, while the core CPI, which excludes food and energy prices, will also moderate to 4% from 4.1%.
Another factor that has been weighing on the US Dollar is the geopolitical tensions in the Middle East, where a conflict between Israel and Iran has escalated in recent days. The US has expressed its support for Israel and condemned Iran’s nuclear activities, while Iran has vowed to retaliate against any attacks on its territory or interests.
The situation has raised concerns about a potential disruption of oil supplies from the region, which accounts for nearly 20% of global oil production. This has boosted oil prices to their highest levels since 2014, adding to inflationary pressures and hurting consumer confidence.
AUD/USD Technical Analysis: Consolidating Within Descending Channel
AUD/USD has been consolidating within a descending channel since reaching a five-month high of 0.6950 on October 11th. The pair bounced off the channel support at 0.6286 on October 16th and is currently trading around 0.6320.
The pair faces immediate resistance at the channel trendline around 0.6350, followed by the 50-day moving average at 0.6380 and the 100-day moving average at 0.6440. A break above these levels could signal a bullish reversal and open the way for a retest of the 0.6950 high.
On the downside, the pair has initial support at the channel support around 0.6280, followed by the October 12th low of 0.6307 and the September 29th low of 0.6194. A break below these levels could confirm the bearish trend and target the August 19th low of 0.6155 and the February 2nd low of 0.6075.
The RSI is hovering around the 50 level, indicating a lack of clear momentum in either direction. The MACD is below the zero line but above its signal line, suggesting some bullish bias.
