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AUDUSD has a head start in 2023, being supported by China and the Fed’s more cautious stance. Will they go on?  Let’s discuss the Forex outlook and make up a trading plan.

Weekly Australian dollar fundamental analysis

As Fed officials unanimously speculate about the benefits of a 25-basis-point increase in the federal funds rate, the World Bank raises China’s 2023 GDP forecast from +2.7% to +4.3%, the AUDUSD bulls go ahead. The Australian dollar has been the top performer among the G10 currencies since the beginning of the year. The start was more than successful. Will the rally continue?

The market doesn’t believe the Fed not only because of its past mistakes. Investors are well aware of what the central bank needs now. The Fed officials repeat the mantra over and over again that the job isn’t done yet. However, the truth is that most of the work is done. The struggle with inflation is not over, and the Fed should continue monetary tightening. The task is now to anchor inflation expectations so that consumers understand that the battle is won, and therefore the next one will be won too. If the regulator announces victory over high prices, it will ignite global risk appetite, improve financial conditions and increase the risks of accelerating inflation with the possibility of a new peak.

If markets understand the difference between words and deeds, why don’t they jump into explosive growth? First, after the many traps set by the Fed in 2022, there is a sense of danger. Secondly, it is possible that the factor of slowing inflation and the Fed’s dovish shift in 2023 is already priced in the market quotes. As soon as CPI accelerates, large-scale sales will hit not only US stock indices but also AUDUSD. The pair has traditionally shown increased sensitivity to risk.

Aussie’s rally is supported by strong economic data in Australia. In November, consumer prices accelerated from 6.9% to 7.4%, and core inflation of +5.6% exceeded Bloomberg experts’ forecast, as did retail sales. The positive data create a kind of safety cushion for the RBA, allowing the central bank to continue the monetary tightening cycle.

Dynamics of cash rate and retail sales in Australia


Source: Bloomberg.

Since May, the cash rate has grown from 0.1% to 3.1%, the derivatives market predicts its ceiling at 3.9%. Derivatives give an 80% chance of a 25-basis-point hike in the main interest rate in February. In fact, the Reserve Bank of Australia is moving at the same speed as the Fed. However, the AUDUSD bulls are supported by the growth of global risk appetite, the opening of the Chinese economy, and a potential slowdown in the US inflation, while in Australia, prices are all still growing.

Weekly AUDUSD trading plan

In the current climate, Aussie’s rally is likely to go on. The primary risks for the AUD bulls are a worsening of the epidemiological situation in China, suggesting another lockdown, or unexpected data on the US inflation that is to be reported on January 12. If consumer prices remain at or close to their previous pace of growth, the AUDUSD pair will fall into a sell-off wave. Otherwise, one could enter long on the corrections with targets at 0.704 and 0.711.

Price chart of AUDUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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