The Australian dollar ended its continuous rise after the release of employment data, as consumer confidence declined and expectations of interest rate cuts limited its upward potential. The US inflation data was lower than expected, and the US dollar weakened, providing support for the Australian dollar. On a technical level, the Australian dollar/US dollar tests the upper boundary of the downtrend channel, with a breakthrough potentially driving an upward trend and a drop below support potentially leading to further decline.

Fundamental analysis

After the Australian employment report released on Thursday (January 16th), the Australian dollar ended three consecutive days of gains. According to data released by the Australian Bureau of Statistics (ABS), Australia's seasonally adjusted unemployment rate for December rose from 3.9% in November to 4.0%, in line with market expectations.

Despite the increase in unemployment rate, the number of employed people in Australia increased by 56300 in December, far higher than November's 28200 (revised to 35600) and significantly exceeding market expectations of 15000. This employment growth indicates a strong performance of the Australian economy in the labor market.

The employment to population ratio has increased by 0.1 percentage points, setting a new record of 64.5%. It is 0.5 percentage points higher than last year and 2.3 percentage points higher than pre pandemic levels, "said Bjorn Jarvis, head of labor statistics at the Australian Bureau of Statistics

At the same time, US President elect Donald Trump's economic team is considering gradually increasing import tariffs, which has made market sentiment more optimistic and supported risk sensitive currencies including the Australian dollar.

Market sentiment of AUD/USD and US inflation data

The US dollar index is currently trading around 109.00, and the US dollar continues to weaken. This trend is due to the lower than expected December US Consumer Price Index (CPI) data. The CPI grew at an annual rate of 2.9%, higher than November's 2.7% and in line with market expectations. However, the monthly CPI rose by 0.4%, higher than the previous month's 0.3%.

After excluding volatile food and energy prices, the annual core CPI in the United States rose by 3.2%, slightly lower than November's 3.3% and lower than analysts' expectations of 3.3%. The monthly core CPI only increased by 0.2%. The US Producer Price Index (PPI) rose 0.2% month on month in December, compared to the expected 0.3%, further exacerbating the weakness of the US dollar.

In this context, the market generally believes that the Federal Reserve may cut interest rates twice this year. The latest report from the Federal Reserve's "Brown Book" shows that economic activity in the 12 Federal Reserve districts slightly increased during November and December. Despite an increase in consumer spending driven by strong holiday sales, manufacturing activity overall showed a slight decline. Some manufacturers have started hoarding inventory in anticipation of increased tariffs.

In a recent speech, Scott Bessent, the nominee for Secretary of the Treasury of the United States, emphasized the importance of maintaining the US dollar as the world's reserve currency. He believes that "productive investment that promotes economic growth should take priority over wasteful spending that drives up inflation

Challenges faced by AUD/USD

Despite strong employment data, consumer confidence in Australia has shown signs of weakness. The latest Consumer Confidence Index released by Westpac has dropped by 0.7% to 92.1 points, reflecting consumers' pessimistic sentiment towards the economic outlook. This decline may put pressure on Australia's economic health and future interest rate prospects. The market currently expects a 67% probability that the Reserve Bank of Australia will cut interest rates by 25 basis points in February, and there may be more rate cuts by April.

Technical analyst interpretation:

AUD/USD is currently trading around 0.6220 and testing whether it can break through the downward channel in the daily chart. If the breakthrough is successful, it may weaken the current bearish trend and push prices further up. On the 14th, the Relative Strength Index (RSI) has approached the level of 50, indicating that the market may recover in the short term.

In the short term, the direct resistance level facing the Australian dollar/US dollar is near the upper boundary of the downtrend channel, at approximately 0.6220. If it breaks through this level, it may continue to rise.

In terms of support levels, the Australian dollar/US dollar may first test the support level around the 14 day moving average of 0.6214, followed by the support level around the 9-day moving average of 0.6206. The more important support is located at the lower boundary of the descending channel, close to the 0.5920 level. If the price falls below this level, it may further decline.

conclusion

From a fundamental analysis perspective, the Australian dollar/US dollar has benefited from the strong employment growth in Australia and the weakening of the US dollar against the backdrop of a slowdown in the US economy. However, the decline in consumer confidence in Australia and market expectations of a rate cut by the Reserve Bank of Australia may constrain the upward potential of the Australian dollar.

From a technical perspective, the Australian dollar/US dollar is currently facing key resistance to an upward trend, and if it breaks through the upper boundary of the downward channel, it may further rise. On the contrary, if it falls below the support level, it may test lower price levels again.