Australian Dollar advances as US Dollar faces challenges amid bond market optimism

• The Australian Dollar appreciates as the US Dollar pulls back after hitting a two-year high of 108.07 on Friday.
• The S&P/ASX 200 Index rose to fresh all-time highs above 8,450, as Australian shares mirrored Wall Street's momentum.
• President-elect Donald Trump has selected Scott Bessent, a seasoned Wall Street veteran and fiscal conservative, as the US Treasury Secretary.

The Australian Dollar (AUD) gains strength on Monday as the US Dollar (USD) continues its downward correction. This movement was partly influenced by bond market optimism following President-elect Donald Trump's selection of fund manager Scott Bessent as the US Treasury secretary, a seasoned Wall Street figure and fiscal conservative. 

The AUD also likely benefited from foreign inflows, driven by a surge in the domestic share market to fresh all-time highs. The S&P/ASX 200 Index climbed 0.63%, surpassing 8,450, as Australian shares mirrored Wall Street's momentum. On Friday, the Dow Jones achieved another record-high close, contributing to the positive sentiment.

Additionally, the Australian Dollar received support from a hawkish stance by the Reserve Bank of Australia (RBA) on future interest rate decisions. Traders are now focused on Australia’s Monthly Consumer Price Index (CPI) for October, a crucial indicator for shaping expectations around domestic monetary policy.

The RBA emphasized in its latest meeting minutes that interest rates would remain restrictive until there is clear evidence of inflation returning sustainably to its target. However, the central bank also highlighted that any future policy adjustments would be data-dependent, underscoring the importance of upcoming economic reports.

Australian Dollar rises as the US Dollar corrects downward after hitting two-year highs

• The US Dollar Index (DXY), which tracks the US Dollar's performance against six major currencies, has eased to around 107.00 after hitting a two-year high of 108.07 on Friday. However, downside risks for the USD remain limited, as recent as robust preliminary S&P Global US Purchasing Managers’ Index (PMI) data has strengthened expectations that the Federal Reserve (Fed) may slow the pace of rate cuts.
• Futures traders are now assigning a 50.9% probability to the Federal Reserve cutting rates by a quarter point, down from approximately 61.9% a week earlier, according to the CME FedWatch Tool. Meanwhile, Treasury yields remain buoyed by expectations that President-elect Donald Trump’s proposed policies on tariffs, immigration, and taxes could spur inflation and constrain the Fed’s capacity to reduce borrowing costs further.
• The S&P Global US Composite PMI climbed to 55.3 in November, indicating the strongest growth in private sector activity since April 2022. The US Services PMI surged to 57.0, up from 55.0 in October and significantly exceeding market expectations of 55.2, marking the sharpest expansion in the services sector since March 2022. Meanwhile, the US Manufacturing PMI increased to 48.8 from 48.5 in October, aligning with market forecasts.
• The Judo Bank Australia PMI Composite Output Index dropped to 49.4 in November from 50.2 in October, indicating a modest contraction in private sector output for the second time in three months. Manufacturing PMI rose to 49.4 in November from 47.3 in October, marking its 10th consecutive month of contraction. Meanwhile, the Services PMI fell to 49.6 from 51.0, signaling the first contraction in services activity in ten months.
• Australia's four largest banks are predicting the Reserve Bank of Australia's first rate cut. Westpac has revised its forecast for the first cut to May, up from February. National Australia Bank (NAB) also expects the cut in May. Meanwhile, Commonwealth Bank of Australia (CBA) and ANZ are both cautiously forecasting a rate cut in February.
• US Initial Jobless Claims dropped to 213,000 for the week ending November 15, down from a revised 219,000 (previously 217,000) in the prior week and below the expected 220,000.
• The Reserve Bank of Australia's November Meeting Minutes indicated that the central bank’s board remains vigilant about the potential for further inflation, stressing the importance of maintaining a restrictive monetary policy. Although board members noted no "immediate need" to alter the cash rate, they kept options open for future adjustments, emphasizing that all possibilities remain on the table.
• Federal Reserve Bank of Chicago President Austan Goolsbee made headlines on Thursday, stating that inflation is steadily approaching the 2% target. Goolsbee also noted that the labor market is nearing stability and full employment. Looking ahead, he anticipates interest rates could drop significantly from their current levels over the next year.
• Fed Chair Jerome Powell downplayed the likelihood of imminent rate cuts, highlighting the economy's resilience, robust labor market, and persistent inflationary pressures. Powell remarked, "The economy is not sending any signals that we need to hurry to lower rates."

Technical Analysis: Australian Dollar breaks above the nine-day EMA to near 0.6550

The AUD/USD pair trades near 0.6540 on Monday, with technical analysis of the daily chart indicating strengthening short-term momentum. The pair has moved above the nine- and 14-day Exponential Moving Averages (EMAs), signaling a potential upward bias.

However, AUD/USD remains confined within a descending channel, suggesting the broader downtrend is still intact. Additionally, the 14-day Relative Strength Index (RSI) is slightly below the neutral 50 level. A decisive breakout above the 50 mark would provide a clearer signal for a directional shift, potentially confirming bullish momentum.

On the downside, the AUD/USD pair may test immediate support at the nine-day EMA at 0.6520. A decisive break below this level could push the pair toward the lower boundary of the descending channel, near its yearly low of 0.6348, last touched on August 5.

Regarding its upside, the AUD/USD pair could aim for the upper boundary of the descending channel at 0.6570. A breakout above this resistance could signal a shift in momentum, potentially opening the path for a rally toward the four-week high of 0.6687.

AUD/USD: Daily Chart