Australian Dollar weakens as robust US economic data dampen rate cut expectations

The US Department of Labor revealed that Sales in March smashed estimates of 0.4% and rose by 0.7% MoM. At the same time, Retail Sales in the control group– used to calculate the Gross Domestic Product (GDP) – jumped from 0.3% in February to 1.1% MoM in March, crushing forecasts of a 0.4% expansion.

Following the data, US Treasury yields soared, a reflection that investors expected fewer interest rate cuts by the Federal Reserve. Data from the Chicago Board of Trade (CBOT) shows traders expecting two rate cuts instead of three toward the end of the year, an indication that rates would end at the 4.75%-5.00% range.

Other data showed that the National Association of Home Builders (NAHB) Housing Market Index remained unchanged at 51 in April due to mortgage rates standing at 7%. NAHB Chairman Carl Harris said, "April’s flat reading suggests potential for demand growth is there, but buyers are hesitating until they can better gauge where interest rates are headed.”

Risk appetite is significantly impacting the AUD/USD, courtesy of tensions arising in the Middle East. The recent offensive by Iran against Israel, which finished without casualties, has underscored the potential volatility in the region and its potential impact on the AUD/USD.

Earlier, New York Fed President John Williams commented that he expects the US central bank to begin to ease policy in 2024 while emphasizing that current policy is restrictive. Regarding the robust retail sales data, he added that strong fundamentals are driving consumer spending.

The lack of economic data from Australia, would keep investors focused on upcoming Chinese data. China’s schedule would feature Industrial Production, GDP, and Retail Sales. If the data proves to be weak, it could undermine the prospects of the AUD/USD and open the door to test 0.6400