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The Australian dollar was hovering around 0.6810 on Tuesday after rebounding on Friday. The AUD/USD currency pair fell 0.06% in 2023, extending a three-year losing streak. However, the pair has rallied over the past two months as a recent slight decline in United States (US) inflation triggered a decline in the greenback. Slowing inflation in the United States has led to speculation that the Federal Reserve will cut interest rates in early 2024.
The Australian dollar has shown resilience, driven by stronger risk appetite, strong inflation and house prices. The minutes of the recent meeting underscored the Reserve Bank of Australia’s (RBA) commitment to carefully review more data to gauge the balance of risks before deciding on future interest rates. The Australian dollar is supported by expectations that the Reserve Bank of Australia may not cut interest rates at its upcoming February policy meeting.
China’s Caixin Manufacturing Purchasing Managers’ Index (PMI) improved in December, hitting 50.8, beating consensus estimates of 50.4 and the previous reading of 50.7. Given the important trade relationship between China and Australia, this positive surprise in manufacturing data could boost the Australian dollar (AUD).
The U.S. Dollar Index (DXY) continues to trend higher, but may face challenges again as market players observe recent declines in U.S. labor data, core PCE inflation, and annualized GDP. On Friday, the Chicago Purchasing Managers Index showed business conditions eased in Illinois, Indiana and Michigan in December.
These indicators validate the view that the U.S. economy slowed in the fourth quarter and herald a possible soft landing for the U.S. economy. This strengthens the case for a rate cut by the Fed in 2024 and puts downward pressure on the dollar.
Australia’s Judo Bank composite and services PMI data for December will be released on Thursday. In the United States, the ISM manufacturing purchasing managers’ index and Federal Open Market Committee (FOMC) meeting minutes will be released on Wednesday.
