Australian Dollar loses ground as traders expect Fed to slow pace of rate cuts

• The Australian Dollar declines following the lower CPI data from its largest trading partner, China.
• The Commonwealth Bank of Australia expects the RBA to implement a 25 basis point rate cut in December.
• The US Dollar appreciates as traders expect the Fed to slow the pace of borrowing cost reductions.

The Australian Dollar (AUD) edges lower after two days of gains against the US Dollar (USD) on Monday. The AUD/USD pair receives downward pressure from the lower-than-expected September Consumer Price Index (CPI) data from its major trading partner China released on Sunday.

The AUD may have attracted sellers after a detailed note from the Commonwealth Bank of Australia indicated expectations that the Reserve Bank of Australia (RBA) will implement a 25 basis point rate cut by the end of 2024. The report suggested that a stronger disinflationary trend than the RBA anticipates is essential for the Board to consider easing policy within this calendar year.

The decline of the AUD/USD pair could also be linked to a stronger US Dollar (USD), fueled by expectations that the US Federal Reserve (Fed) will slow the pace of borrowing cost reductions more than previously anticipated. According to the CME FedWatch Tool, the markets are pricing in an 86.9% chance of a 25 basis point rate cut in November, with no expectation for a 50-basis-point reduction.

Daily Digest Market Movers: Australian Dollar depreciates following lower inflation data from China

• The risk-sensitive AUD/USD pair might have received downward pressure due to escalating tensions in the Middle East that have sparked concerns of a broader regional conflict. According to CNN, at least four Israeli soldiers were killed, and over 60 people were injured in a drone attack in north-central Israel on Sunday.
• The National Bureau of Statistics of China reported that the country's monthly Consumer Price Index (CPI) remained unchanged at 0% in September, down from August's 0.4% increase. The annual inflation rate rose by 0.4%, falling short of the anticipated 0.6%. Additionally, the Producer Price Index (PPI) decreased by 2.8% year-on-year, a larger drop than the previous decline of 1.8% and exceeding expectations of a 2.5% decrease.
• On Saturday, the National People's Congress expressed an optimistic outlook following a briefing from China's Ministry of Finance (MoF). The MoF emphasized key priorities focused on stabilizing the property market and tackling local government debt issues. The ministry indicated that special bonds would be issued to support both bank recapitalization and efforts to stabilize the real estate sector.
• The US Producer Price Index (PPI) for September remained unchanged at 0%, below August's 0.2% month-on-month increase. Meanwhile, the monthly core PPI, which excludes food and energy prices, expanded by 0.2% as expected, down from 0.3% the prior month.
• Chicago Fed President Austan Goolsbee spoke to Bloomberg, commending the progress made on inflation and the labor market. Goolsbee noted that despite the positive jobs report for September, there are no indications of overheating in the economy.
• Last week, the Reserve Bank of Australia released the Minutes from its September monetary policy meeting, suggesting that board members examined potential scenarios for both lowering and raising interest rates in the future. The discussion indicated that future financial conditions may need to be either tighter or looser than current levels to meet the Board's objectives.

Technical Analysis: Australian Dollar holds position below 0.6750, lower boundary of the descending channel

The AUD/USD pair trades near 0.6730 on Monday. Technical analysis of the daily chart indicates that the pair is testing the upper boundary of the descending channel. A successful breach would indicate a potential for momentum change from bearish to bullish bias. However, the 14-day Relative Strength Index (RSI) is positioned below the 50 level, suggesting that bearish momentum is still active.

Regarding resistance, the AUD/USD pair could test the nine-day Exponential Moving Average (EMA) at 0.6766 level, followed by the psychological level of 0.6800.

On the downside, the AUD/USD pair could explore the region around the lower boundary of the descending channel at 0.6640 level, followed by its eight-week low of 0.6622, recorded on September 11.

AUD/USD: Daily Chart