Australian dollar pauses after strong gains

The Australian dollar is showing limited movement on Tuesday, after posting sharp gains at the start of the week. In the North American session, AUD/USD is trading at 0.7133, up 0.10% on the day.

There are no tier-1 events out of Australia this week, but the data released this week is pointing upwards. The AIG Performance of Services Index for December and January punched past the 50-level into expansion territory, with a reading of 56.2, up from 49.6 beforehand. This was the first reading showing expansion in five months. This was followed by an excellent retail sales report for Q4, with gains of 8.2%, which was above expectations.

Aussie business confidence rebounds

Earlier today, the NAB Business Confidence survey in January jumped 15 points to +3, after a miserable -12 reading in December. However, the survey noted that business conditions weakened. With the government announcing that it will reopen the international borders and allow tourists in later this month, the economy should get a significant boost.

At last week’s RBA meeting, Governor Lowe said that a hike could be a year away or even longer, but the markets aren’t buying it. Lowe is clearly in no rush to raise rates and may not have abandoned the view that inflation is transient and will ease in the near term. The markets, in contrast, are more hawkish and feel that high inflation will prompt the RBA to raise rates in the second half of 2022.

In the US, we’ll get a look at key inflation data on Thursday. The numbers could have an impact on the size of the expected rate hike next month. The markets have priced in a 33% chance of a 50-basis points hike. The Fed generally sticks to quarter-point moves, but may feel the need to inject a large hike in order to hit hard at inflation and res-establish credibility after taking heat for waiting too long to tighten policy.

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AUD/USD Technical

• AUD/USD faces resistance at 0.7168 and 0.7258
• There is support at 0.6987 and 0.6896
• AUD/USD is near the 50% Fib of 0.7314-0.6968

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