At the beginning of this week, the Australian dollar (AUD) received market support, benefiting from a rebound in risk sentiment and strong commodity prices. As of the latest quotation, the Australian dollar against the US dollar (AUD/USD) was at 0.6209, up 0.24% for the day, reflecting market optimism. The latest strong trade data from China has boosted investor confidence, and the weakening of the US dollar has further supported the Australian dollar. However, the market focus remains on the upcoming release of the US Consumer Price Index (CPI) data, which is expected to provide new clues for inflationary pressures and the Federal Reserve's future monetary policy.

The main factors supporting the Australian dollar

One of the factors supporting the Australian dollar is strong trade data from China. As the world's second-largest economy, China's economic performance directly affects Australia, especially in the trade sector. Recent data shows that despite the challenges facing the global economy, China's export growth remains strong, demonstrating that demand for Australia's main export commodities, such as iron ore, remains robust.

The rise in commodity prices, especially the rebound in metal and energy prices, has also supported the Australian dollar. As a currency closely related to commodity prices, the Australian dollar usually benefits when global demand for resources is stable, and the recent rebound in commodity prices further supports the Australian dollar.

The US dollar is weakening, and PPI data is weak

On the other hand, the US dollar is under pressure, especially after the release of the December Producer Price Index (PPI) data in the United States. The PPI in December increased by 0.2% month on month, lower than the market expectation of 0.3%. Although it grew by 3.3% year-on-year, the largest increase since February 2023, it is still lower than the market expectation of 3.4%. The weakness of this data has intensified market expectations that the Federal Reserve may adjust its tightening policy.

The US dollar index (DXY) fell under the influence of this news and is currently trading around 109.20. The market's attention has turned to the US CPI data to be released later this week, which is expected to further reveal the direction of the Federal Reserve's policy. If inflation data slows down, it may strengthen market expectations that the Federal Reserve will adopt a more moderate pace of interest rate cuts, which could continue to put pressure on the US dollar.

Market sentiment and the outlook of the Federal Reserve

Investor sentiment has also been influenced by speeches by Federal Reserve officials, particularly Kansas Fed President Jeffrey Schmid who pointed out that the Fed's interest rate policy is approaching long-term equilibrium levels. Schmid emphasized that although the balance sheet still needs to be reduced, future interest rate adjustments should be gradual and determined based on economic data. This cautious wording has prompted the market to reduce expectations of the Federal Reserve's aggressive policy shift, thereby exacerbating the weakening of the US dollar.

Domestic factors in Australia and RBA policy prospects

Despite external factors providing support, there is still some pressure on the domestic economic situation in Australia. A key concern factor is the sustained weakness in consumer confidence. The consumer confidence index of Westpac, an Australian bank, fell by 0.7% in January, reflecting continued market concerns about the economic outlook. The continuous depreciation of the Australian dollar against the US dollar may be an important reason for the decline in consumer confidence, as the rise in imported commodity prices directly erodes residents' purchasing power.

In addition, market expectations for the policies of the Reserve Bank of Australia (RBA) have also changed. The market currently expects that the Reserve Bank of Australia may cut interest rates by 25 basis points in February, and the possibility of a complete rate cut in the coming months is gradually increasing, especially before April 2025. The slowdown of the Australian economy, especially the low consumer confidence, may prompt the RBA to make more loose monetary policy decisions, thereby exerting downward pressure on the Australian dollar.

Technical analysis of AUD/USD

From a technical perspective, AUD/USD is still in a downward trend on the daily chart, with prices currently around 0.6190, indicating a sustained bearish trend. However, the current price level also indicates that AUD/USD has recovered from oversold status, with the 14 day relative strength index (RSI) still above 30, suggesting a possible short-term rebound.

For AUD/USD, the main resistance level recently is around the 9-day moving average (EMA) of 0.6193, followed closely by the 14 day EMA of 0.6207. The more important resistance range is located at the upper boundary of the descending channel, approximately 0.6220. If the price breaks through this level, it may imply the continuation of the rebound.

On the downside, AUD/USD may test the lower boundary of the downtrend channel, around 0.5940. If the price falls below this support level, it may lead to further downward pressure.

Future outlook and summary

Looking ahead, the trend of the Australian dollar will strike a balance between global risk sentiment, commodity price trends, and the domestic economic situation in Australia. Despite strong trade data from China and rising commodity prices supporting the Australian dollar, weak domestic consumer confidence and expectations of a possible interest rate cut by the Reserve Bank of Australia may put pressure on the Australian dollar.

Meanwhile, the market will also closely monitor the US CPI data later this week, which may provide more clues for the Federal Reserve's policy direction and affect global market risk sentiment. If inflation data falls below expectations, it may increase market expectations for a moderate rate cut by the Federal Reserve, providing further support for the Australian dollar.

Overall, although the Australian dollar has recently rebounded against the US dollar, the market remains cautious, and future trends will depend on upcoming economic data and changes in global market risk appetite.