AUD/USD clings to key trendline heading into US inflation

Fed to pause in Jan?

90% of economists are backing a 25bp Fed cut next week and for them to pause in January, according to a Reuters poll. This is similar to market pricing, with Fed fund futures implying an 86.1% chance of a cut next week and 90.4% chance of a pause at their following meeting.

The same poll estimates the Fed funds to fall to 3.5% to 3.75% or lower by the end of 2025, which leaves room for a minimum of 100bp of cuts (three cuts next year to follow one this month).

RBA open the door to cuts

The RBA held rates at 4.35% as expected, tipped their hat to “weak growth”, noted lower “upside risks to inflation” and removed a key part of their statement hinting at a potential hike. By effectively removing their hawkish bias from the statement, the door has now been opened for the cut markets have been pricing in.

Governor bullock hit the wires after the meeting to say that while upside inflation risks have eased, they have not gone away. Regardless, RBA cash rate futures maintained their convictions of three cuts to arrive next year, having fully priced in a 25bp cut in April, July and December.

View my take on RBA statement in yesterday’s video: The RBA just made a small (but big) change to their statement

Wall Street indices continued lower on Tuesday ahead of a key US inflation report later today. The S&P 500 and Nasdaq were down for a second day while the Dow Jones tallied up its fourth bearish day. It is plausible to think that traders are taking a breather after pushing indices to record highs, knowing that if Santa's rally is to play out this year it tends to come in the second half of the month. The weak performance of Wall Street also weighed on ASX 200 futures which are now -2% off the record high, after last week’s soft GDP figures weighed on local sentiment.

USD/JPY reached my 152 target outlined in yesterday’s report and shows the potential to extend its gains should US inflation come in slightly hot. USD/CAD briefly touched a 4-year and 8-month high ahead of the BOC meeting. USD/CHF bounced off the August high and invalidated the head and shoulders top, which I suggested could happen last week. And it shows further upside potential over the near term.

Economic events in focus (AEDT)

The consensus is for the Bank of Canada to cut rates by 50bp to 3.25% but signal a slower pace of easing next year. This makes sense, as it allows them to get said cuts out of the way and reassess as the political landscape and inevitable trade tug-o-war develops next year with Trump.

US inflation is the main event, although forecasts are a tad uninspiring with core CPI expected to remain steady at 2.7% y/y and 0.3% m/m. But anything higher could further support the USD, raise the odds of a December pause for the Fed and potentially see AUD/USD break key support.

• 10:50 – JP PPI
• 12:30 – RBA chart pack
• 21:00 – OPEC monthly report
• 00:30 – US core CPI
• 01:45 – BOC interest rate decision (-50bp cut expected)

AUD/USD technical analysis:

At current levels, AUD/USD is trying to form an inverted hammer at a key support level (2022 trendline). But it seems unlikely we’ll close the week at this level with US Inflation data pending. We’re therefor on guard for a breakdown or bounce from current levels.

The best bet the Aussie has for a rally appears to be in the hands of a weak US inflation report, which seems unlikely.

The 1-hour chart shows the swift reversal lower from Tuesday’s high. A false break of the 2022 trendline shows a slight hesitancy to roll over for now and raises the potential for a minor bounce in today’s Asian session. But given the daily bearish trend and potential for a stronger US dollar and weaker yuan (which AUD shares a strong correlation with), I suspect any such bounce will be seen as a gift for bears who are eyeing a move towards 63c.

Note the lower weekly implied volatility sits neat 63c, with a historical VPOC also close by for potential support.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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