On Monday during European hours, the AUD/USD pair snapped its five-day losing streak, trading in the vicinity of 0.6200. The pair has gained ground because the US dollar has softened in the thinly traded market ahead of the New Year holiday, and US Treasury bond yields have declined.
The US Dollar Index (DXY), used to gauge the dollar against six major currencies, hovers around 108.00. As of writing, the 2-year and 10-year yields on US Treasury coupons are 4.30% and 4.59% respectively. Despite the current lull, the US dollar could get a boost from the rising anticipation of fewer rate cuts by the US Federal Reserve (Fed) next year. Traders are still coming to terms with the Fed’s hawkish pivot in December, where it made a quarter-point cut while indicating only two rate cuts for 2025.
In contrast, the Australian dollar has found support. Its 10-year government bond yield has climbed to around 4.50%, reaching its highest mark in over a month. The Reserve Bank of Australia (RBA) has restated its dedication to maintaining a “sufficiently restrictive” policy stance until inflation uncertainty eases and the 2 – 3% target range is met.
The RBA has made it clear that taming inflation is its top priority, and future rate decisions will be data-driven. The December meeting minutes showed that policymakers at the central bank are growing more confident in their ability to manage inflation, though they also recognized the persistent risks. Market sentiment is split: some expect a 25 basis points rate cut as soon as February, while a more widespread expectation is for a full easing cycle to kick in by April.
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