The US dollar weakened broadly yesterday following a softer-than-expected US ISM Manufacturing PMI. While the data was not a surprise, the dollar gave back gains made during the European session after the report. Overall, macroeconomic conditions have remained largely unchanged over the past two weeks. Recent US NFP and CPI figures have been on the soft side, with the market currently pricing around 62 basis points of Federal Reserve easing by the end of the year.
Despite some December data being affected by shutdown-related factors, upcoming releases are expected to provide a clearer outlook. The market anticipates the Fed’s earliest rate cut in March, so very soft data this month would be needed to accelerate this. Should softer data persist, markets will probably increase expectations for easing in 2026, putting further downward pressure on the US dollar. Conversely, stronger data could reduce rate cut bets and offer support to the greenback.
Turning to the Australian dollar, the Reserve Bank of Australia (RBA) took a more hawkish stance at its last meeting, driven by several higher-than-expected inflation prints recently. The RBA also mentioned the possibility of a rate hike at some point in 2026. The market is currently pricing a 32% chance of a rate increase at the February meeting, with total tightening of about 43 basis points expected by year-end.
Tomorrow’s Australian monthly inflation data will be a key focus. Although the RBA pays more attention to quarterly inflation figures, traders will closely analyse the monthly update for clues on future monetary policy. Given the hawkish market sentiment, a soft inflation report could have a greater impact—likely causing the AUD to weaken broadly while potentially buoying the Australian stock market. Conversely, a hotter inflation reading would probably support the AUD but weigh on stocks.
AUD/USD Technical Analysis
On the daily chart, AUD/USD has formed a rising wedge pattern, confirmed by RSI divergence. Such patterns often indicate fading momentum and can lead to one of two outcomes: a bounce from the lower trendline pushing the pair toward new highs, or a break below this line sending the price down to the wedge base near the 0.66 level.
Zooming into the 4-hour chart, the price action within the wedge is clearer. Buyers may enter near the lower trendline, with a defined risk threshold just below 0.6660, aiming for a rally to the 0.68 level. Sellers will be looking for a break below the trendline to increase bearish positions, targeting the 0.66 area.
At the 1-hour timeframe, there is minor support around 0.6705. If the price reaches this zone, buyers could step in, placing stops just below this level to position for a move toward the upper trendline. Conversely, sellers will watch for a break below support to ramp up bearish bets toward the lower trendline. The red lines on the chart denote today’s average daily trading range.
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Tomorrow’s economic calendar includes Australian monthly inflation data alongside US ADP employment figures, the US ISM Services PMI, and US Job Openings data. On Thursday, US Jobless Claims figures will be released, followed by the closely watched US Nonfarm Payrolls report on Friday.
Traders should monitor these releases closely, as they will provide clearer insights into future central bank policy moves and currency direction.
Original Source: Giuseppe Dellamotta of investinglive.com
