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Forex Market: AUD/USD stuck in narrow range despite robust Australian retail sales, Fed Chair Powell’s testimony now in focus

AUD/USD was a notch stronger on Tuesday, but remained stuck within a narrow daily range, since a hawkish US interest rate outlook outweighed recent upbeat macro data from Australia.

Retail sales in Australia were reported to have risen at a monthly rate of 7.3% in November, which far exceeded a consensus of analyst estimates of 3.9%. The latest increase brought sales in the country to a new all-time high of AUD 33.41 billion, according to the Australian Bureau of Statistics.

Data suggested Australia’s economy had a lot of momentum to weather the disruptions caused by the rapid spread of the Omicron coronavirus strain.

“Retail sales are now running at 5.8% over the year, which is very high and well above the trend in spending that was occurring before the pandemic,” Diana Mousina, a senior economist at AMP Capital, was quoted as saying by Reuters.

Investors have long been betting that inflation and economic growth will be sufficiently strong to prompt the Reserve Bank of Australia to raise borrowing costs by mid-2022, with markets pricing a rate hike to 0.25% in June.

RBA policy makers, however, have not once stated that a rate hike is not likely until 2023.

Meanwhile, markets awaited a speech by Federal Reserve Chair Jerome Powell during a congressional hearing later on Tuesday. Market players are expecting the Fed Chair to offer clues over the timing of monetary policy tightening, when he answers questions from the Senate Banking Committee.

The US Dollar Index was edging down 0.10% to 95.849 on Tuesday, while remaining well below a 16-month peak it reached on November 24th.

“We expect any dollar dips to be short-lived as the imminent Fed tightening story continues to offer a very positive undercurrent for the greenback,” ING FX analysts wrote in an investor note.

“An acknowledgement that faster rate hikes are needed could be enough to offer more support to the dollar today.”

Several leading Wall Street banks now expect four interest rate increases from the Federal Reserve in 2022, with the earliest in March.

As of 10:42 GMT on Tuesday AUD/USD was edging up 0.21% to trade at 0.7182, while moving within a daily range of 0.7167-0.7196. Last Friday the Forex pair slipped as low as 0.7130, which has been its weakest level since December 22nd (0.7121).

Bond Yield Spread

The spread between 2-year Australian and 2-year US bond yields, which reflects the flow of funds in a short term, equaled -43.66 basis points (-0.4366%) as of 9:15 GMT on Tuesday, up from -44.9 basis points on January 10th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.7173
R1 – 0.7197
R2 – 0.7227
R3 – 0.7251
R4 – 0.7275

S1 – 0.7143
S2 – 0.7119
S3 – 0.7089
S4 – 0.7059

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