Australian dollar drifting ahead of confidence data

The Australian dollar is showing limited movement on Monday. In the North American session, AUD/USD is trading at 0.6532, up 0.12%.

Australia kicks off the week with consumer and business confidence data, both of which have been weak. The Westpac Consumer Sentiment index declined by 1.3% in January and is expected to improve to -0.8% in February. The NAB business confidence index has been in negative territory for three months but is showing improvement and climbed to -1 in December, compared to -8 in November. The market estimate for January stands at 1.

Australia’s economy has been hurt by weak global demand for its exports and the slowdown in China has only made things worse. The world’s second-largest economy is in a deflationary phase and there is the danger that deflation is becoming entrenched. Domestic consumption has weakened and confidence is falling, as evidenced by the massive drop in the Chinese stock market. Deflation was virtually unheard of prior to the Covid pandemic, but China’s shaky recovery has resulted in prolonged deflation and less demand. China is Australia’s largest export destination and further weak numbers out of China will likely spell trouble for the Australian dollar.

The Federal Reserve is on board for rate cuts this year, but it has remained hawkish and continues to push back against market expectations. In December, Fed rate odds for a March cut were above 70%, but the odds have slid to just 15%, as the US economy remains surprisingly strong and Fed members have dampened hopes of a March cut. We’ll hear later today from Richmond Fed President Thomas Barkin. Last week, Barkin said that he wants to be sure that inflation is clearly headed to 2% before he supports lowering rates and he is likely to reiterate this stance today.

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AUD/USD Technical

• 0.6554 and 0.6583 are the next resistance lines
• 0.6512 and 0.6483 and providing support

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