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Aussie Dollar Aims Higher on Shift in RBA vs. Fed Policy Outlook

Fundamental Forecast for Australian Dollar: Bullish

  • Aussie Dollar to Rise if Jobs Data Cools RBA Rate Hike Speculation
  • Soft US CPI, PPI Results to Undercut Fed Outlook and Boost AUD
  • Help Find Key Australian Dollar Turning Points with DailyFX SSI

The Australian Dollar will have to balance competing forces in the week ahead, with a dose of potent home-grown economic data vying for influence alongside macro-level crosscurrents. On balance, the currency seems likely to continue to recover having started the year at the lowest in over five years against its US counterpart.

Domestically, the spotlight will be on December’s Employment report. Expectations suggest the economy added 5,000 jobs last month, amounting to the weakest reading in three months. Australian economic news-flow has notably improved relative to consensus forecasts over the past four weeks however, suggesting economists are underestimating the economy’s momentum and opening the door for an upside surprise.

Such an outcome may pour cold water on building RBA interest rate cut speculation. Indeed, a gauge of the implied outlook reflected in OIS pricing points to at least one 25bps reduction in the baseline lending rate over the next 12 months and has been creeping closer toward calling for two over recent weeks. A jobs report that pushes back against this dynamic is likely to offer support to the Australian Dollar.

On the external front, US data will be in focus. The response to December’s payrolls data suggests that – with only a handful of exceptions – FX markets are splintering away from broader sentiment trends. The parallel declines in the S&P 500 and the US Dollar apparently triggered by soft wage growth readings hint the former is concerned with global growth trends while the latter is focused specifically on the Fed policy outlook.

US retail sales, inflation and consumer confidence figures as well as the Fed’s Beige Book survey of regional economic conditions are all due to cross the wires in the coming days. The growth side of the equation looks mixed considering the Fed’s assessment is likely to take a balanced view and sentiment is seen firming while retail activity is expected to slow. Though this casts a cloud of uncertainty over sentiment trends, the FX picture looks clearer as soft price growth undercuts Fed rate hike bets, sending AUDUSD higher.