Australian Dollar recovers its recent losses amidst an escalated tension in Middle East

• Australian Dollar moves on an upward trajectory during a risk aversion sentiment.
• Australia's Retail Sales (MoM) is expected to decline by 0.7% in December from the previous growth of 2.0%.
• Middle East situation has escalated due to the killings of three US service members in a drone attack on a US outpost in Jordan.
• US Dollar improves on the back of higher US bond yields.

The Australian Dollar (AUD) trades higher on Monday, recovering its recent losses in the previous session. The AUD/USD pair advances despite a stronger US Dollar (USD) amid heightened geopolitical tensions. Overnight on Sunday, three United States (US) service members were killed and at least 24 were injured in a drone attack on a US outpost in Jordan, near its border with Syria. Reports suggest that the administration of US President Joe Biden and the US military are formulating specific plans on how to respond to the attack that resulted in the death of three US troops. Possible measures being considered by the military include strikes into Iran, marking a significant escalation if implemented.

Australia's money market holds steady due to the upbeat Crude oil prices. The Aussie Dollar (AUD) might have also gained support from recent news indicating additional stimulus measures by the People's Bank of China (PBoC). The Reserve Bank of Australia’s (RBA) Bulletin has indicated that businesses, over the past six months, generally expect a moderation in their price growth, with prices anticipated to remain above the RBA's inflation target range of 2.0–3.0%. However, the RBA is anticipated to lower borrowing costs later this year. Investors await Tuesday's Australian Consumer Price Index (CPI) data, expecting a decline of 0.7% against the previous increase of 2.0%.

The US Dollar Index (DXY) cheers the improved US Treasury bond yields, which in turn, could limit the advances of the AUD/USD pair. On Friday, the US Core Personal Consumption Expenditures Price Index (PCE) for December showed a 0.2% monthly increase, in line with expectations, compared to 0.1% in the previous reading. The yearly Core PCE rose 2.9%, falling short of the 3.0% expected and the previous reading of 3.2%.

The Federal Open Market Committee (FOMC) statement is scheduled for Wednesday, January 31, with the consensus expecting the Committee to leave the Fed Funds rate unchanged at 5.25-5.50%. However, the market bias toward a rate cut in March may exert downward pressure on the USD. Additionally, Tuesday's Housing Price Index and Consumer Confidence figures will be closely watched for further market insights.

Daily Digest Market Movers: Australian Dollar improves despite an improved US Dollar

• Australia's Manufacturing PMI increased from 47.6 to 50.3, showcasing improvement. Services PMI also saw an uptick, rising from 47.1 to 47.9. The Composite PMI registered an increase, reaching 48.1 compared to December's 46.9.
• Chinese financial media reported that the People's Bank of China (PBoC) may cut the Medium-term Lending Facility (MLF) rate in the current quarter. The announcement follows the recent statement by PBoC Governor Pan Gongsheng, who revealed that the Bank would reduce the Required Reserve Ratio (RRR) by 50 basis points starting from February 5th.
• US Treasury Secretary Janet Louise Yellen has remarked that the robust performance of the US economy in the fourth quarter is viewed as a positive development and is not likely to pose challenges in terms of inflation.
• The US Gross Domestic Product Annualized (Q4) reported a reading of 3.3% against the previous reading of 4.9%, exceeding the market consensus of 2.0%.
• US Initial Jobless Claims for the week ending on January 19, surprisingly reduced to 214K compared to the expected increase of 200K from 189K prior.

Technical Analysis: Australian Dollar moves towards the psychological level at 0.6600

The Australian Dollar trades around 0.6580 on Monday, encountering initial resistance at the psychological threshold of 0.6600. This level coincides with the 23.6% Fibonacci retracement at 0.6606, aligned with the 14-day Exponential Moving Average (EMA) at 0.6610. A decisive breakthrough above this resistance area may propel the AUD/USD pair towards the key barrier at 0.6650. Conversely, downside movement could lead to a revisit of the previous week's low at 0.6551, aligning with the significant level at 0.6550. If this support is breached, the pair could revisit the monthly low at 0.6524.

AUD/USD: Daily Chart