Australian Dollar edges lower on risk-off sentiment, improved US Dollar

• Australian Dollar faced challenges on risk-off mood and bearish commodity prices.
• Australian Services and Composite PMI reduced to 47.1 and 46.9, respectively, in December.
• US ISM Manufacturing PMI increased to 47.4 in December from the previous reading of 46.7.

The Australian Dollar (AUD) faces challenges as it struggles to halt its losing streak on Thursday. The AUD/USD pair is under downward pressure due to risk-off sentiment and a general bearish session in the commodity complex. The softer Judo Bank Purchasing Managers Index (PMI) data further adds pressure on the Aussie Dollar (AUD).

Australia's Services sector contracted in December, according to the latest Judo Bank Services PMI. The index reported a reading of 47.1, falling short of market expectations that it would remain consistent at 47.6. Additionally, the Composite PMI decreased to 46.9 from the previous figure of 47.4. This marks the fastest pace of Services contraction since the third quarter of 2021.

Matthew De Pasuale, Economist at Judo Bank, suggests that recent readings over the past two months indicate that while the Australian economy is slowing down, the slowdown is not accelerating. Despite households grappling with continuous challenges posed by elevated interest rates, both the output and new order indexes persist at levels that align with the Reserve Bank of Australia's (RBA) anticipated soft landing scenario.

The US Dollar Index (DXY) seems to remain on a positive trajectory, strengthened by improved United States (US) Treasury yields. The positive momentum may also find support from the enhanced ISM Manufacturing PMI report, which showed an increase to 47.4 in December from the previous reading of 46.7, surpassing the market consensus of 47.1. However, JOLTS Job Openings contracted to 8.79 million, falling short of the expected figure of 8.85 million in November.

The December minutes from the Federal Open Market Committee (FOMC) suggest that participants think the policy rate has either reached or is close to its highest point in the current tightening cycle. However, they emphasized that the specific trajectory of the policy would hinge on the evolving economic conditions.

Daily Digest Market Movers: Australian Dollar faces challenges on risk-off sentiment

• Australia’s Judo Bank Manufacturing PMI indicated a modest contraction in manufacturing activity, declining to 47.6 in December from the previous reading of 47.8.
• RBA's internal documents revealed a slip in domestic tourism demand. Additionally, consumers are reported to be trading down to more affordable products or reducing their overall purchases due to cost-of-living pressures. However, the documents suggest that private sector wage growth has stabilized at around 4.0%.
• Australian Prime Minister Anthony Albanese announced that he has directed Treasury and Finance to explore measures that can alleviate the financial burden on families in terms of cost of living without exerting additional pressure on inflation.
• The characterization of the January 13 presidential and parliamentary elections by China as a choice between war and peace could add to the geopolitical tensions in the region. A senior Chinese official has urged Taiwan's people to make a "correct choice," hinting at the potential consequences based on election outcomes.
• China’s NBS Manufacturing PMI for December reduced to the reading of 49.0 from the previous 49.4 figure. The market expectation was an increase to 49.5. While NBS Non-Manufacturing PMI improved to 50.4 from the 50.2 prior but fell short of the 50.5 expected.
• US ISM Manufacturing Employment Index improved to 48.1 in December from 45.8 in November.
• US S&P Global Manufacturing PMI posted a lower-than-expected figure of 47.9, diverging from the anticipated consistency at 48.2.

Technical Analysis: Australian Dollar moves below the major level at 0.6750

The Australian Dollar trades near 0.6730 on Thursday, with a significant resistance level at 0.6750 and the nine-day Exponential Moving Average (EMA) at 0.6765 potentially acting as key hurdles. A successful breakthrough above the EMA could pave the way for the AUD/USD pair to challenge the psychological barrier at 0.6800. On the downside, crucial support lies at the 23.6% Fibonacci retracement level of 0.6725. If breached, it might exert downward pressure, leading the pair towards psychological support at 0.6700, followed by the 38.2% Fibonacci retracement level at 0.6637.

AUD/USD: Daily Chart