• The Australian dollar gained support against the US dollar on divergence in RBA and Fed policy.
• The PBoC decided to keep the one-year and five-year borrowing rates constant at 3.35% and 3.85%, respectively.
• The U.S. dollar is struggling amid the growing likelihood of further interest rate cuts by the Federal Reserve in 2024.

The Australian dollar (AUD) is reversing daily losses and extending its rally against the US dollar (USD) following the People’s Bank of China’s (PBoC) interest rate decision on Friday. The PBoC decided to keep its one-year and five-year lending rates (LPR) unchanged at 3.35% and 3.85% respectively. As close trading partners, any changes in the Chinese economy could significantly impact Australian markets.

The AUD/USD pair received support following Thursday’s jobs report and the Federal Reserve’s (Fed) 50 basis point (bps) rate cut on Wednesday. The monetary policy divergence between the Reserve Bank of Australia’s (RBA) commitment to keep rates higher for an extended period of time and the Fed’s easing cycle is likely to affect the pair’s movement in the near term.

The US dollar is facing challenges amid rising expectations of further rate cuts by the US Federal Reserve by the end of 2024. The latest scatterplot forecasts suggest a gradual easing cycle, with the median rate for 2024 revised down to 4.375% from 5.125% forecasted in June.

Federal Reserve Chairman Jerome Powell commented on the aggressive rate cut, saying, “This decision reflects our growing confidence that with appropriate changes to our policies, we can keep the labor market strong, support moderate economic growth, and bring inflation down to a sustainable level of 2 percent.”

Daily Market Update: Australian dollar gains against US dollar on divergence in central bank policies

• The Commonwealth Bank (CBA) has revised its expectations for the Reserve Bank of Australia’s first interest rate cut by 25 basis points, moving it from November 2024 to December 2024. The change comes amid solid employment growth and the central bank’s continued hawkish outlook, according to Yahoo Finance.
• U.S. Treasury Secretary Janet Yellen said Friday that the Federal Reserve’s recent interest rate cut is a very positive indicator for the U.S. economy. Yellen said it shows the Fed’s confidence that inflation has fallen significantly and is headed toward its 2% goal. Meanwhile, the labor market continues to show strength.
• Australia’s employment change was 47.5k in August, down from 58.2k in July but well above the consensus forecast of 25.0k. The unemployment rate remained stable at 4.2% in August, in line with expectations and the previous month’s data, according to data released by the Australian Bureau of Statistics (ABS).
• The Federal Open Market Committee (FOMC) lowered the federal funds rate to a range of 4.75% to 5.0%, marking the Fed’s first rate cut in more than four years. The move signals the Fed’s commitment to protecting jobs and steering the economy away from any signs of recession.
• Federal Reserve policymakers updated their quarterly economic forecasts, raising their median unemployment forecast to 4.4% by the end of 2024, up from a 4% estimate in June. They also raised their longer-term forecast for the federal funds rate to 2.9% from 2.8%.
• Economists at Goldman Sachs and Citi have cut their forecasts for China’s 2024 GDP growth to 4.7%, below Beijing’s target of around 5.0%. SocGen describes the scenario as a “downward spiral,” while Barclays refers to it as “from bad to worse” and a “vicious cycle.” Morgan Stanley also warns that “things could get worse before they get better,” according to a Reuters report.
• China’s economy showed signs of weakness in August, with a continued slowdown in industrial activity and falling property prices. That has put pressure on Beijing to boost spending to stimulate demand, the National Bureau of Statistics reported on Saturday, according to Business Standard.
• Reserve Bank of Australia (RBA) Governor Michele Bullock has stressed that considering rate cuts is premature given persistently high inflation. In addition, RBA Deputy Governor Sarah Hunter noted that while the labour market remains tight, wage growth appears to have peaked and is expected to sluggish further.

Technical Analysis: Australian Dollar Holds Rising Wedge Position Near 0.6800

The AUD/USD pair is trading near 0.6810 on Friday. Technical analysis on the daily chart shows that the pair is moving higher within a rising wedge pattern, signaling a strengthening bullish bias. Furthermore, the 14-day Relative Strength Index (RSI) is approaching the 70 level, indicating an ongoing bullish trend for the pair.

On the upside, the AUD/USD pair could explore the area around the upper boundary of the rising wedge at 0.6870. A break above the rising wedge could support the pair in testing the psychological level of 0.6900.

On the other hand, the AUD/USD pair is testing the lower boundary of the rising wedge near the 0.6800 level. A break of this level could put pressure on the pair and prompt it to test the nine-day exponential moving average (EMA) at 0.6760, with the next support at the psychological level of 0.6700.

AUD/USD: Daily Chart