Australian Dollar improves on domestic market confidence after a surge on Wall Street

• Australian Dollar gains ground on improved domestic share market following a tech surge on Wall Street.
• Australian subdued employment data reinforced the speculation on early interest rate cuts by the RBA.
• US Dollar gains demand as heightened tensions in the Red Sea bolster the risk aversion sentiment.
• Upbeat US housing and labor data contribute to diminishing the narrative of Fed rate cuts in March.

The Australian Dollar (AUD) moves on an upward trajectory for the second successive day on Friday. The Australian Dollar (AUD gains positive momentum against the US Dollar (USD) due to the strengthened domestic share market, fueled by a technology surge on Wall Street following robust labor data from the United States (US). This surge has heightened market confidence in the economy, and investors are steering clear of uncertainties regarding the interest rate trajectory set by the Federal Reserve (Fed).

Australia’s dollar encounters a hurdle amid speculation surrounding potential early interest rate cuts by the Reserve Bank of Australia (RBA). This belief gained traction following an unexpected decline in Employment Change data released on Thursday for December. Adding to this sentiment, a recent survey of 40 economists conducted by “The Australian Financial Review” indicated that respondents anticipate the RBA initiating interest rate cuts as early as September.

Middle East conflict bolsters the risk aversion sentiment as heightened tensions in the Red Sea are prompting traders to seek safe-haven assets, leading to increased demand for the US Dollar. This, in turn, is exerting downward pressure on the AUD/USD pair. The situation escalated as the US-led military coalition conducted a series of strikes on Houthi targets in Yemen in response to missile attacks by the Iran-backed Houthi group on maritime vessels during the week.

The US Dollar Index (DXY) consolidates with a positive bias to continue its winning streak. Another round of favorable figures in key US indicators has provided further momentum to the upside bias in the US Dollar, reinforcing the prevailing narrative of a more prolonged period of tightened monetary policy by the US Fed. The upward movement in US Treasury yields is also contributing to the positive momentum, providing additional support for the Greenback.

US Housing Starts (MoM) surpassed expectations in December, reaching 1.46 million compared to the anticipated 1.426 million. Building Permits for the month also saw an increase, rising to 1.495 million, surpassing the market consensus of 1.48 million. Meanwhile, Initial Jobless Claims for the week ending on January 12 decreased to 187,000 from the previous reading of 203,000.

However, there was a decline in the Philadelphia Fed Manufacturing Survey for January, registering at -10.6 against the anticipated decline of -7.0. Looking ahead, traders are likely to pay attention to the preliminary Michigan Consumer Sentiment Index for January, with an expected improvement to a reading of 70 from December's figure of 69.7.

Daily Digest Market Movers: Australian Dollar gains ground on improved domestic market

• Australia’s Consumer Inflation Expectations remained steady at 4.5% in January.
• Aussie seasonally adjusted Unemployment Rate held firm at 3.9% in line with expectations for December.
• Australian Employment Change decreased by 65.1K, contrary to the anticipated increase of 17.6K.
• Australia's Consumer Confidence declined by 1.3% in January as compared to the previous increase of 2.7%.
• China’s annual Gross Domestic Product (GDP) grew by 5.2% against the 5.3% expected in the fourth quarter.
• Chinese December’s Industrial Production (YoY) increased by 6.8%. which was expected to remain consistent at 6.6%.
• China’s Retail Sales year-over-year came at 7.4%, falling short of the market consensus of 8.0%.
• Federal Reserve Governor Christopher Waller cautioned that, despite positive developments in the inflation outlook, the central bank is not rushing to outline plans for rate cuts.
• US Retail Sales (MoM) rose by 0.6% in December, exceeding the market consensus of 0.4 and 0.3% prior.
• US Retail Sales Control Group improved to 0.8% from the previous reading of 0.5%.
• US Retail Sales ex Autos (MoM) grew by 0.4% as compared to the market anticipation of remaining consistent at 0.2%.

Technical Analysis: Australian Dollar maintains its position above major level at 0.6550

The Australian Dollar trades near 0.6580 on Friday followed by the psychological resistance level at 0.6600 level. A break above the barrier could push the AUD/USD pair to approach the nine-day Exponential Moving Average (EMA) at 0.6623 followed by the major level at 0.6650. If the pair surpasses the major level, it could attempt to test the psychological level at 0.6700. On the downside, the 50% retracement level at 0.6568 before the major level at 0.6550 could act as an immediate support zone. A break below the zone could influence the AUD/USD pair to navigate the region around the psychological level at 0.6500 aligned with the 61.8% Fibonacci retracement level at 0.6497.

AUD/USD: Daily Chart