• Australian dollar slides as risk appetite slides

The Australian dollar is sharply lower against the US dollar on Tuesday. In the North American session, AUD/USD is trading at 0.65897 down 0.94% and has fallen to its lowest level in a month.

US dollar powers higher

The US dollar struggled against the major currencies in the last two months of 2023 but has surged out of the gates early in the new year. The Australian dollar has taken it on the chin and is down 3.1% in January. There are two main reasons why the US dollar has dramatically rebounded over the past two weeks.

First, the exuberance in the markets over rate cuts has dissipated somewhat, especially after the December nonfarm payroll and inflation reports were stronger than expected. The Fed jumped on the rate-cut bandwagon in December when it pivoted from its ‘higher for longer’ script. Since then, however, Fed members have pushed back against market expectations for six rate cuts this year, starting in March.

Atlanta Fed President Bostic has said he expects only two rate cuts this year and has urged the Fed not to rush into lowering rates since that could lead to higher inflation and undermine confidence in the economy. Bostic said that he expected inflation to fall slowly and rates would need to stay on hold at least until the summer. Other Fed members are also sounding cautious about lowering rates.

Secondly, risk appetite has taken a hit due to soaring tensions in the Middle East. The war between Israel and Hamas has dragged on for over three months and fighting has escalated between Israel and Hezbollah on the Israel-Lebanon border. As well, Yemen’s Houthis continue to attack shipping in the Red Sea, which has disrupted a key global shipping route. If hostilities in the Middle East ratchet higher, risk appetite is likely to fall further and make the safe-haven US dollar even more attractive to nervous investors.

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AUD/USD Technical

• AUD/USD has pushed below several support lines and is testing support at 0.6601. Below, there is support at 0.6556
• There is resistance at 0.6732 and 0.6777

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