What Do Australia's Budget Concerns Mean for the AUD/USD?

Economic

Forex

Summary:

AUD/USD falls to a two-year low amid a hawkish Federal Reserve and domestic economic concerns highlighted in the Reserve Bank of Australia's December meeting minutes.

AUD/USD falls to a two-year low

AUD/USD ended last week at 0.6251 (-1.75%), marking its lowest weekly close in two years - 10% below its high of 0.6942 on 30 September.

Impact of hawkish Fed and MYEFO report

Last week's decline followed the Federal Reserve's (Fed) hawkish interest rate cut, which sent the United States (US) dollar and yields surging, and came after the Australian Federal Government's Mid-Year Economic and Fiscal Outlook (MYEFO) report indicated larger budget deficits over the coming four years.

Raising eyebrows, the MYEFO also included off-budget spending classified as 'investments' for measures such as student debt relief and childcare subsidies, which understates the true size of the budget deficit.

RBA meeting minutes

Date: Tuesday, 24 December at 11.30am AEDT

The minutes from the Reserve Bank of Australia's (RBA) December Board meeting, where the RBA kept rates on hold at 4.35% for a ninth consecutive meeting, are scheduled to be released on Christmas Eve.

The decision was accompanied by a dovish shift in tone in the statement and the press conference. The statement removed language emphasising vigilance toward upside inflation risks and noted the board was 'gaining some confidence that inflation is moving sustainably towards target.'

Economic activity had been weaker than expected. 'National accounts for the September quarter show that the economy grew by only 0.8 per cent over the past year.'

In the press conference, RBA Governor Bullock clarified her previous comments around the need for 'more than one' good inflation print, which could be construed more broadly to encompass a range of data heading into the February meeting.

The meeting minutes will likely sound dovish in line with the statement and will be watched for more details about scenarios in which future financial conditions might need to be less restrictive. Comments on growth, household spending, consumer sentiment, and inflation will draw extra scrutiny.

The Australian rates market starts the new week pricing in a 58% chance of a 25 basis point (bp) cut from the RBA in February, with a first full 25 bp cut priced for April 2025.

AUD/USD technical analysis

In late September, AUD/USD rejected multi-month downtrend resistance at 0.6900 - 0.6910, coming from the 0.8007 high of February 2021 and the 1.1081 high from July 2011.

The sell-off accelerated last week after breaking below multi-month trend line support at approximately 0.6370 - 0.6350.

What Do Australia's Budget Concerns Mean for the AUD/USD?_1

From its late September 0.6942 high to last week's 0.6199 low, AUD/USD has fallen more than 10% over the past 12 weeks.

Last week’s break of the 0.6270 low of October 2023 fell narrowly short of the support coming from the 0.6170 low of October 2022. Should the 0.6170 support level now fall, it would open the way for a test of the psychologically significant 0.6000 level.

A rebound above 0.6350 - 0.6370 would be the first indication that downside risks are easing and that AUD/USD is moving to work off oversold readings. What Do Australia's Budget Concerns Mean for the AUD/USD?_2

What Do Australia's Budget Concerns Mean for the AUD/USD?_2

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