AUD/USD and NZD/USD Fundamental Daily Forecast – Aussie Tumbles Amid Shocking Drop in Retail Sales

The Australian and New Zealand Dollars are under pressure on Tuesday as investors continue to trim positions ahead of the start of the U.S. Federal Reserve’s two-day meeting on Tuesday.

Traders expect the Fed to raise its benchmark interest rate by 25-basis points on Wednesday, but they are more interested in how high the central bank will raise rates and how much longer.

Disappointing economic data out of Australia is also weighing on the Aussie Dollar. While Non-Manufacturing PMI data from China surprised to the upside. In New Zealand, traders are still adjusting to last week’s cooler than expected consumer inflation report, while bracing for labor market data later in the week.

At 03:26 GMT, the AUD/USD is at .7039, down 0.0021 or -0.30% and the NZD/USD is at .6452, down 0.0017 or -0.26%. On Monday, the Invesco CurrencyShares Australian Dollar Trust ETF (FXA) settled at $70.42, up $0.05 or +0.07%.

Australian Dollar Pressured by Weak Retail Sales News

Sellers hit the AUD/USD on Tuesday after data showed retail spending took a shock tumble in December and likely dragged on economic growth, trimming expectations for how much further interest rates might have to rise.

The latest price retreat came after a report revealed Australian retail sales dived 3.9% in December, far exceeding forecasts of a 0.3% dip and the biggest drop since August 2020 when coronavirus restrictions were hammering the sector.

Investors were still wagering the Reserve Bank of Australia (RBA) would hike by a quarter point to 3.25% at its February policy meeting next week, given recent inflation figures for the fourth quarter had been alarmingly high.

China Economic Activity Swings Back to Growth in January – Official PMI

Although it’s not having a positive effect on the Aussie and Kiwi at this time, China’s economic activity swung back to growth in January, official data showed on Tuesday, after a wave of COVID-19 infection passed through the country faster than expected following abandonment of pandemic controls.

The official purchasing managers’ index (PMI), which measures manufacturing activity, rose to 50.1 from 47.0 in December, the National Bureau of Statistics (NBS) said on Tuesday. Economists in a Reuters poll had predicted the PMI to come in at 48.0. The 50-point mark separates contraction from growth.

Short-Term Outlook

The impressive data from China is likely to have a positive influence on the Australian and New Zealand economies over the long-run. At this time, the biggest influences on the Aussie and Kiwi are the size of their respective central banks’ rate hikes later in the month.

Last week, AUD/USD buyers were driven by hotter-than-expected consumer inflation data. Today, the selling is being fueled by worries over consumer spending with the drop in retail sales. Nonetheless, we still believe the RBA will raise its benchmark by 25 basis points next week.

For New Zealand, the main focus this week will be on employment for the fourth quarter, due to be released on Wednesday. Traders will be eyeing labor costs or wages. Strong growth in this area will solidify a 50 – 75 basis point rate hike by the RBNZ later in the month.