Australian Dollar holds ground as traders adopt caution ahead of Fed policy

• The Australian Dollar remained steady after domestic consumer confidence showed signs of strain.
• Australia’s Westpac Consumer Confidence fell 2% in December, against November’s 5.3% increase.
• The US Dollar struggles as traders are bracing for an expected 25 basis point rate cut from the US Fed.

The Australian Dollar (AUD) trades flat following domestic consumer confidence indicating signs of strain, with December data showing a decline as consumers grow increasingly pessimistic about the economic outlook. Moreover, traders are anticipating a potential interest rate cut by the US Federal Reserve (Fed) on Wednesday, with attention largely focused on the Fed's projections for 2025.

Westpac Consumer Confidence in Australia fell 2% to 92.8 points in December, reversing two months of positive momentum. The index increased 5.3% in November. Traders will likely observe US Retail Sales data scheduled to be released later in the North American session.

The US Dollar (USD) remains subdued for the third successive session amid market caution ahead of the Fed decision. On Monday, the preliminary S&P Global Composite Purchasing Managers Index (PMI) rose to 56.6 in December, from 54.9 prior. Meanwhile, the Services PMI improved to 58.5 from 56.1. The Manufacturing PMI declined to 48.3 in December, from the previous 49.7 reading.

According to the CME FedWatch tool, markets are now almost fully pricing in a quarter basis point cut at the Fed's December meeting. Investors will closely monitor Fed Chair Jerome Powell's press conference and Summary of Economic Projections (dot-plot) after the meeting.

Australian Dollar remains flat due to market caution ahead of the Fed's decision

• Chinese authorities, led by President Xi Jinping, have pledged to raise the fiscal deficit target next year, shifting policy focus to consumption to boost the economy amid looming 10% US tariffs threatening exports. The lack of concrete details on fiscal support has put downward pressure on the AUD, given China's status as Australia's largest trading partner.
• China’s Retail Sales (YoY) rose 3.0% in November, against its expected 4.6% and previous 4.8% readings. Meanwhile, annual Industrial Production increased by 5.4%, exceeding the market consensus of a 5.3% rise.
• The National Bureau of Statistics (NBS) in China shared its economic outlook during a press conference on Monday. It stated that the economy remained generally stable in November, with increasing signs of positive changes. The recovery trend in consumption remains intact, and the bureau emphasized plans to implement additional policies aimed at expanding domestic demand.
• Traders are increasing their bets that the Reserve Bank of Australia (RBA) will cut interest rates sooner and more significantly than initially expected. However, future decisions will be data-driven, with evolving risk assessments guiding the RBA's approach.
• The preliminary Australia's Judo Bank Manufacturing Purchasing Managers Index (PMI) declined to 48.2 in December from 49.4 in November. Meanwhile, the Services PMI eased to 50.4 in December from the previous reading of 50.5. The Composite PMI dropped to 49.9 in December versus 50.2 prior.
• Beijing has already begun retaliation against Trump trade sanctions, launching a probe into Nvidia, threatening to blacklist a US apparel company, blocking the export of critical minerals to the United States, and tightening the supply chain for drones.
• The RBA kept the Official Cash Rate (OCR) unchanged at 4.35% in its final policy meeting in December. RBA Governor Michele Bullock highlighted that while upside inflation risks have eased, they persist and require ongoing vigilance. The RBA will closely monitor all economic data, including employment figures, to guide future policy decisions.

Technical Analysis: Australian Dollar maintains position above 0.6350, yearly lows

The AUD/USD pair continues to maintain its position near 0.6370 on Tuesday. Analysis of a daily chart suggests a bearish bias prevails as the pair is confined within a descending channel pattern. Additionally, the 14-day Relative Strength Index (RSI) hovers above the 30 level, indicating sustained bearish momentum is active.

The AUD/USD pair continues to face initial support at a yearly low of 0.6348, last seen on August 5. A break below this level could put downward pressure on the AUD/USD pair to approach the descending channel’s lower boundary around the 0.6170 level.

Regarding its resistance, the AUD/USD pair tests the nine-day Exponential Moving Average (EMA) at 0.6390, followed by the 14-day EMA at 0.6412, which is aligned with the descending channel’s upper boundary. A decisive breakout above this channel could drive the pair toward the eight-week high of 0.6687.

AUD/USD: Daily Chart