Australian dollar hits 5-month high on soft US data

The Australian dollar punched across the symbolic 70 line earlier on Wednesday, for the first time since August. The Aussie has given up all of these gains and is unchanged at 0.6986 in the North American session.

US retail sales fall

December didn’t bring much cheer to retailers, as the traditional holiday season was a massive disappointment. US consumers cut back on spending and retail sales for a second straight month. December’s retail sales fell 1.1%, driven lower by a decline in vehicle sales due to rising interest rates for vehicle loans, as well as lower gas prices. This was lower than the November reading of -1.0% (revised from -0.6%) and the consensus of -0.8%. Core retail sales also declined by -1.1%, compared to -0.6% in November and the forecast of -0.8%.

Today’s producer price inflation report was another signal that inflationary pressures are easing. Headline PPI came in at -0.5% m/m in December, compared to 0.2% in November and the consensus of -0.1%. The core rate rose 0.1%, lower than the 0.2% read in November (revised from 0.4%) but in line with the forecast.

With consumer spending and inflation heading lower, the markets are more confident that the Fed may end its rate-hike cycle after a 25-bp increase in February and perhaps cut rates before the end of the year. This sentiment has sent the US dollar lower against the majors today, and if the economy continues to churn out weak numbers, we can expect the US dollar to continue to lose ground.

Australia releases inflation and employment data on Thursday. The Melbourne Institute Inflation Expectations dropped to 5.2% in November and the December reading could signal which way inflation is heading. The employment market remains strong and is expected to have created 22,500 new jobs in December after an excellent gain of 64,000 in November. Traders should be prepared for possible volatility from AUD/USD on Thursday.

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AUD/USD Technical

• 0.6944 and 0.7027 are the next resistance lines
• AUD/USD has support at 0.6892 and 0.6810

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