Weekly AUD/USD Outlook: Bears Target Sub-63c for Australian Dollar

This week marks a pivotal time for global financial markets, with the meetings of five central banks—including those of the US, Japan, the UK, Norway, and Sweden. Among them, the Federal Open Market Committee (FOMC) meeting is expected to have the most significant impact on the AUD/USD currency pair. Analysts are generally anticipating a 25 basis point rate cut by the Federal Reserve, with expectations for the Fed to hold rates steady in January. Current futures pricing indicates a 96% likelihood of a rate cut this week, and only a 52% chance of another reduction in March. Thus, any unexpected dovishness from the Fed could lead to stronger moves in AUD/USD.

In addition to the potential rate cut, the Fed will unveil its updated staff forecasts—something that hasn't occurred since the presidential election. This provides a complex environment for the Fed, as there is uncertainty surrounding the implications of new economic policies introduced by the Trump administration. Given this unpredictability, it's likely that the Fed will emphasize uncertainties to cushion against criticism or backlash.

With the core Personal Consumption Expenditures (PCE) inflation rate currently at 2.7%, surpassing their 2.6% forecast, there is a possibility that the 2025 inflation projection could be adjusted upward from 2.2% to as high as 2.3% or 2.4%. Moreover, the median expectations for the Fed funds rate for 2025 have been lowered to 3.4% from 4.1% in June, indicating a significant drop from the present rate of 5%. This creates room for upward revisions, although Fed fund futures suggest limited probabilities for even two rate cuts in the upcoming year, showcasing a notable disparity. Consequently, should the Fed take a more dovish stance, it may weaken the US dollar while strengthening the AUD/USD, moving it from what could be considered oversold levels.

On Thursday, attention will then pivot to the Bank of Japan (BOJ) meeting, occurring less than 12 hours after the FOMC. Market sentiment has shifted, with traders increasingly skeptical about the likelihood of an interest rate hike from the BOJ. While this reduces the potential impact on AUD/USD, any unexpected decisions could spark volatility and trigger a risk-off sentiment, affecting the currency pair.

AUD/USD Correlations:

• The Chinese yuan continues to play a crucial role in driving AUD/USD.
• The yield differential between Australian and US bonds is recovering, highlighting the significance of this week’s FOMC meeting.
• There has been a noticeable decoupling between the correlation of iron ore prices and AUD/USD.

AUD/USD Technical Analysis

The Australian dollar has not responded firmly to the bullish RSI divergence that has been forming since late October. This divergence has not dipped into oversold territory, indicating that the macroeconomic factors influencing the Aussie may weigh more heavily than the divergence itself. Should the US dollar continue to strengthen while the yuan weakens, AUD/USD faces the risk of dropping below 0.63.

Resistance is being capped by the 10-day Simple Moving Average (SMA), which could serve as a reloading zone for bearish traders unless the Fed delivers an unexpectedly dovish outcome. The 20-day SMA is positioned nearby, creating a dynamic resistance cluster for traders to navigate.

Furthermore, the one-week implied volatility range has expanded to approximately 275 pips, with the lower limit resting at 0.6269—correlating with the lows observed in 2022 and 2023.