Deciphering FOMC: Implications for the Australian Dollar

The FOMC impact on AUD/USD is crucial; the Australian dollar awaits signals amid falling wedge formation. Key levels and market sentiment analyzed.

In the world of currency markets, all eyes are on the Federal Open Market Committee (FOMC) as Australian Dollar (AUD) bulls eagerly anticipate signals for a potential bullish continuation. As the AUD/USD trades within a falling wedge formation, market participants closely monitor the US Producer Price Index (PPI) and the forthcoming FOMC decisions, which will be later today.

Despite positive consumer confidence data for December in Australia, the Australian dollar struggled to gain ground against the USD this week. The US Consumer Price Index (CPI) created ripples in the market, only to return to normalcy today. Speculation on a slowing US disinflation rate and a robust Non-Farm Payrolls (NFP) report raises questions about premature expectations for significant rate cuts by the Federal Reserve.

Deciphering FOMC: Implications for the Australian Dollar

In a recent statement, Reserve Bank of Australia’s (RBA) Governor Bullock emphasized a data-dependent approach leading up to the following interest rate announcement on February 6, 2024. The focus now shifts to the Fed’s decisions, particularly Chairman Jerome Powell’s messaging and the potential pushback against revised dovish repricing. While not expecting additional rate hikes, the governor may underscore the necessity of maintaining restrictive monetary policy to combat inflation. The market is closely watching for hints of easing initiation and its scale.

Money markets currently price 110 basis points of cumulative rate cuts in 2024, with the first cut potentially in May. Simultaneously, the US PPI, seen as a leading indicator for CPI, is expected to rise. Any upside surprise in the PPI could exert negative pressure on the Australian dollar.

Examining the AUD/USD daily price action reveals a consistent decline since testing the long-term trendline resistance zone, now trading below the 200-day moving average. The Relative Strength Index (RSI) suggests no clear directional bias, while a falling wedge pattern has formed. A breakout above wedge resistance could retest the 0.6596 swing high, mainly if the FOMC delivers a dovish outcome later in the evening.

Key levels to watch include trendline resistance at 0.6700, wedge resistance at 0.6596, and crucial support levels at 0.6500, 0.6459/50-day moving average, and 0.6358. IG Client Sentiment Data reveals a bearish sentiment among retail traders (AUD/USD), with 65% holding long positions, adding an exciting dynamic to the overall market sentiment.

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