AUD/USD dips under 0.7200, breaks key short-term trend support as equities decline

• AUD/USD slipped under 0.7200 on Tuesday as key short-term trend support was broken and amid downside in global equities.
• Aussie traders were also fretting about further domestic data that showed weakening consumer confidence and Omicron infections surge.

AUD/USD broke below key short-term trendline support earlier during Tuesday’s session and has subsequently fallen underneath the 0.7200 level. At current levels in the 0.7180s, AUD/USD trades lower on the day by about 0.3%, a reflection of weakness in global equity markets which were rocked on Tuesday by sharp upside in US government bond yields and a stronger USD. A much weaker than expected NY Fed manufacturing survey did not have a lasting impact on FX markets, perhaps given Aussie traders are also fretting about another sharp downturn in weekly ANZ Consumer Confidence data, as new data revealed during Tuesday’s Asia Pacific session.

The Australian bank’s measure of consumer sentiment slid dropped 7.6% last week to its lowest since October 2020, below its levels during the surge in Delta infections during 2021 that saw certain areas of the country enter prolonged lockdowns. David Plank, ANZ's head of Australian economics, commented that “we don't think the economy is as weak as these data might suggest, with the shock of the Omicron surge and strains on testing capability the key drivers of the fall rather than underlying economic conditions”. However, the bank warns that the “result highlights that concerns about COVID have the potential to significantly impact the economy if they linger”.

Evidence of the economic impact of the Omicron surge complicates the RBA’s upcoming monetary policy decision, particularly regarding whether or not to end QE buying in February or to taper the purchase rate and continue until May. Recent economic data and the hawkish shift at the Fed and other major central banks (like the BoE) supports the case for an immediate end to QE next month. Traders now look ahead to December labour market data due on Thursday that will provide further inputs to the pre-Omicron recovery story. Further buck strength and risk-off flows risk sending AUD/USD back towards 2022 lows just below 0.7150 in the absence of another massive positive Australian labour market surprise.