Fed Expected to Pause in January
A recent Reuters poll indicates that a substantial 90% of economists anticipate a 25 basis point cut from the Federal Reserve next week, with expectations for a pause in January. This sentiment aligns closely with market expectations, as Fed fund futures suggest an 86.1% likelihood of a cut in the upcoming meeting, and a robust 90.4% chance of a pause in January's follow-up session.
Further forecasts from the same poll project that the Federal funds rate may decline to between 3.5% to 3.75% or potentially lower by the end of 2025, indicating there could be at least 100 basis points of cuts ahead, including three anticipated reductions next year following one this month.
RBA Signals Possible Rate Cuts
The Reserve Bank of Australia (RBA) maintained the cash rate at 4.35%, as widely anticipated, while expressing concerns about “weak growth” and signifying a reduction in “upside risks to inflation.” By omitting previous indications of further rate hikes, the RBA has opened the door to potential cuts that the market has been anticipating.
Following the meeting, Governor Bullock emphasized that while inflation risks have lessened, they remain a consideration. Despite this, futures tied to the RBA cash rate have fully accounted for expectations of three 25 basis point cuts in April, July, and December of the following year.
Watch my analysis on the RBA's recent statement in the latest video: The RBA just made a notable adjustment to their monetary stance.
Wall Street indices experienced a downturn on Tuesday as investors awaited a crucial U.S. inflation report. The S&P 500 and Nasdaq continued to decline for a second consecutive day, while the Dow Jones marked its fourth straight day in the red. This pullback may reflect traders taking a momentary pause after reaching record highs, anticipating that any traditional “Santa's rally” might manifest later this month. The decline in U.S. stocks has also impacted futures for the ASX 200, which are now trailing 2% below record highs following last week’s disappointing GDP figures that dampened local market sentiment.
The USD/JPY reached my previously set target of 152, maintaining the potential for further upward movement if the U.S. inflation data comes in stronger than expected. The USD/CAD touched a four-year and eight-month high ahead of the Bank of Canada's meeting. Meanwhile, USD/CHF rebounded from its August high, potentially signaling the invalidation of the previously suggested head and shoulders pattern, indicating further upside in the near term.
Key Economic Events to Watch (AEDT)
Market expectations suggest that the Bank of Canada will implement a 50 basis point cut, bringing the rate down to 3.25%. However, a cautious stance regarding the pace of future reductions is also anticipated as they navigate the evolving political landscape and trade relations that are likely to intensify next year.
The upcoming U.S. inflation data is the focal point of attention, although the forecasts are subdued, predicting a core Consumer Price Index (CPI) steady at 2.7% year-over-year and 0.3% month-over-month. A higher-than-expected report could bolster the USD, increase the likelihood of a December pause by the Fed, and potentially drive the AUD/USD below significant support levels.
- 10:50 – JP PPI
- 12:30 – RBA chart pack
- 21:00 – OPEC monthly report
- 00:30 – U.S. core CPI
- 01:45 – BOC interest rate decision (50bp cut expected)
AUD/USD Technical Outlook
Currently, the AUD/USD is attempting to form an inverted hammer pattern at a crucial support level identified by the 2022 trendline. However, it appears unlikely that the pair will close the week at these levels considering the impending U.S. inflation data. Thus, we are preparing for potential either a breakout or a rebound from current levels.
The chances of a rally for the Australian dollar seem to hinge on a disappointing U.S. inflation report, which appears improbable.
Examining the one-hour chart, there has been a rapid downward reversal since Tuesday’s peak, indicating a false break of the 2022 trendline and suggesting a temporary hesitance to decline further. This raises the possibility of a minor bounce during today’s Asian session. However, given the prevailing daily bearish trend and the likelihood of a strengthening U.S. dollar alongside a weakening Chinese yuan (with which the AUD has a strong correlation), any potential bounce is likely to be viewed as an opportunity for bearish traders eyeing a move toward 63 cents.
Note that the lower weekly implied volatility aligns closely with the 63 cent mark, with historical volume point of control also nearby, which could act as support.
