Australian Dollar gains as the USD backs off

The Australian Dollar holds above 0.6350 in the Asian session.
US Dollar slips as markets anticipate a Fed interest rate cut.
Preliminary US PMIs failed to give the USD traction.

The Australian Dollar holds the bounce above 0.6350 in Monday’s session, supported by mixed Chinese economic releases and a softer US Dollar. Traders remain focused on Wednesday’s Federal Reserve (Fed) interest rate decision, which could shape near-term price action.
On the data front, S&P PMIs came in strong but failed to give the USD traction.

Daily digest market movers: Aussie holds gains as USD fails to move on strong S&P PMIs

The US S&P Global Composite PMI rose to 56.6 in December’s flash estimate from 54.9, reflecting accelerating private sector growth, while Services PMI improved to 58.5 from 56.1.
Conversely, the Manufacturing PMI dipped to 48.3 from 49.7, highlighting uneven sector performance.
Despite strong US data, USD weakness persists ahead of the Fed decision, offering a mild lift to the Aussie.
China’s mixed data and the stronger Australian jobs market offer some support to the Aussie, but upside remains capped by Fed uncertainty.
For Wednesday’s Fed decision, markets have practically priced in a cut, but the bank’s messaging will be key.

AUD/USD technical outlook: Aussie flirts with oversold conditions as momentum weakens

The Relative Strength Index (RSI) sits near 34, hovering close to oversold conditions with little directional bias. Meanwhile, the Moving Average Convergence Divergence (MACD) histogram prints decreasing red bars, underscoring weakening momentum. With the pair deep in negative terrain, an upward correction might occur if the USD continues softening. That might be triggered on Wednesday after the Fed’s decision.

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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