In the early stages of the European session, the AUD/USD pair exhibits a lack of decisive direction, oscillating within a narrow range around the 0.6520-0.6525 area. This price action comes following a nearly three-week low last Thursday, maintaining a relatively muted stance for the day.
Investors are exercising caution and opting to stay on the sidelines ahead of the upcoming congressional testimony by Federal Reserve Chair Jerome Powell scheduled for Wednesday and Thursday. Powell’s remarks are anticipated to offer insights into the potential trajectory of interest rates, consequently influencing the performance of the US Dollar (USD). Additionally, the beginning of the month brings significant US macroeconomic data, culminating in the eagerly anticipated Nonfarm Payrolls (NFP) report on Friday, which is poised to act as a catalyst for fresh movements in the AUD/USD pair.
Recent developments, including the disappointing US ISM Manufacturing PMI and the University of Michigan’s Consumer Sentiment Index, coupled with less hawkish comments from Fed officials, have reinforced expectations of a June rate cut. This sentiment keeps USD bulls on the defensive, providing tailwinds for the AUD/USD pair. Further support for the Australian Dollar (AUD) is derived from optimism surrounding potential additional stimulus measures from China.
Nevertheless, a slightly subdued global risk sentiment, evident in the softer tone around US equity futures, restrains traders from adopting aggressive bullish positions on the risk-sensitive Aussie. Additionally, the prevailing consensus that the Reserve Bank of Australia (RBA) is unlikely to raise rates further, fueled by lackluster domestic inflation figures and weaker Retail Sales data last week, acts as a limiting factor for upside potential in the AUD/USD pair.
Given these dynamics, a cautious approach is advised, waiting for robust follow-through buying signals before confirming the formation of a near-term bottom and considering positions for a substantial upward move. In the absence of pertinent US macro data on Monday, the movement of US bond yields will play a pivotal role in shaping USD demand. Furthermore, broader risk sentiment is expected to influence USD price dynamics, presenting short-term trading opportunities within the AUD/USD pair.
