AUD/USD seeks strength to surpass 0.7040, US PMI and Australian Inflation are in spotlight

• AUD/USD is struggling to extend gains above the immediate resistance of 0.7040.
• Reserve Bank of Australia might continue its restrictive monetary policy despite a contraction in economic activities.
• Federal Reserve is highly likely to decelerate the pace of policy tightening to 25 bps amid softening inflation.
• AUD/USD is expected to continue its upside momentum broadly as momentum oscillators are supporting the Australian Dollar.

AUD/USD has sensed selling interest while attempting to surpass the immediate resistance of 0.7040 in the Asian session. The Aussie asset is witnessing heat after the release of the downbeat preliminary Australian S&P PMI (Jan) data in early Tokyo. Also, a recovery in the US Dollar Index (DXY) has triggered volatility in the Aussie asset.

The US Dollar Index has recovered after dropping to near 101.50. The USD Index has refreshed its day’s high at 101.61 as investors are supporting the safe-haven assets again amid a decline in the demand for US government bonds. The 10-year US Treasury yields have recaptured the critical resistance of 3.52%. Meanwhile, the S&P500 futures are aiming to recover their morning losses. The 500-US stock basket futures witnessed significant buying interest on Monday amid rising chances of further deceleration in the pace of policy tightening by the Federal Reserve (Fed).

Australian Manufacturing PMI trims straight for seven month

According to the preliminary S&P PMI (Jan), Australian Manufacturing PMI has trimmed consecutively for the seven-month to 49.8 while the street was expecting an expansion to 50.3. Also, the Services PMI has dropped vigorously to 48.3 from the consensus of 49.7. Rising interest rates by the Reserve Bank of Australia (RBA) in its fight against stubborn inflation are leading to a contraction in economic activities. The absence of easy money for firms to execute investment and expansion plans along with bleak economic demand has trimmed the scale of economic activities.

Australian economic activities could recover ahead as China is on the path of recovery now after dismantling Covid-inspired lockdown curbs. According to a note from JPMorgan, Australia’s economy could be no small beneficiary of an end to China’s zero-Covid policy over the next two years. Also, China’s reopening could boost Australia’s economy by 1%.

Investors await Australian Inflation for further guidance

This week, investors will keenly focus on the release of the Australian Consumer Price Index (CPI) data for the fourth quarter of CY2022, which is scheduled for Wednesday. According to the estimates, the annual CPI is expected to escalate further to 7.5% from the prior release of 7.3%. While monthly inflation is seen sharply higher at 7.7% from the former release of 7.3%.

A release of the unchanged or higher-than-anticipated Australian inflation data might force the Reserve Bank of Australian Governor Philip Lowe to hike its Official Cash Rate (OCR) further. It is worth noting that the Reserve Bank of Australia is continuously hiking the interest rates to trim inflation, however, the energy prices are continuously ruining the whole plan.

Australian Treasurer Jim Chalmers cited that the worst part of the country's inflation crisis was over. He believes "The Australian economy will begin to soften a bit this year and that is the inevitable likely consequence of higher interest rates and a slowing global economy.”

Federal Reserve to trim the pace of restrictive policy further

Multiple catalysts belonging to the United States are conveying that inflation is softening further. Firms have been forced to release fewer employment opportunities due to the lower Producer Price Index (PPI) amid bleak economic projections. Also, US Treasury Secretary Janet Yellen cited on Monday that overall, she has a “good feeling that inflation is coming down.” This has further accelerated the odds of 25 basis points (bps) interest rate hike by the Federal Reserve (Fed) in its February monetary policy meeting.

According to the CME FedWatch tool, the odds of a 50 bps interest rate hike have vanished significantly. More than 98% chances are favoring a 25 bps interest rate hike by Federal Reserve chair Jerome Powell. It is worth noting that the Federal Reserve has already trimmed the scale of hiking interest rates after four consecutive 75 bps interest rate hikes to 50 bps in its December monetary policy meeting.

AUD/USD technical outlook

AUD/USD is marching towards the five-month high plotted from January 18 high at 0.7064 on an hourly scale. The Aussie asset displayed a V-shape recovery from January 19 low around 0.6875, which provides confidence that bullish momentum is present in the current trend. The 20-period Exponential Moving Average (EMA) around 0.7020 is constantly providing cushion to the Australian Dollar.

Also, the Relative Strength Index (RSI) (14) is oscillating in a bullish range of 60.00-80.00, which indicates that the upside momentum is solid.