The Australian Dollar (AUD) continued its upward trajectory against the US Dollar (USD) for the second consecutive session on Monday, buoyed by an overall improvement in market risk appetite.
Despite waning expectations for Federal Reserve interest rate cuts, the AUD saw gains as investors turned optimistic. Attention now turns to Australia’s Retail Sales data scheduled for Tuesday, with expectations of a 0.3% growth in April, following a previous decline of 0.4%.
Recent minutes from the Reserve Bank of Australia (RBA) meeting indicated uncertainty regarding future changes in the cash rate, citing data that suggests inflation could persist above the 2-3% target for an extended period. This sentiment has bolstered the Australian Dollar’s position.
US Dollar Weakens Amid Mixed Economic Indicators
The US Dollar weakened following the release of the University of Michigan’s 5-year Consumer Inflation Expectations for May, which slightly undershot expectations at 3.0%. Despite a revision of the Consumer Sentiment Index to 69.1, up from a preliminary reading of 67.4, it remained at its lowest level in six months. These figures contributed to speculation about potential rate cuts by the Federal Reserve.
According to the CME FedWatch Tool, the probability of a 25 basis-point rate cut in September decreased to 44.9% from 49.0% the previous week. However, with the US market closed on Monday for the Memorial Day bank holiday, trading activity may be subdued.
Market Movements and Key Indicators
China’s launch of a US$47 billion state-backed fund to bolster its semiconductor industry could impact the Australian market, given the countries’ close trade ties.
The ASX 200 Index rose above 7,770 on Monday, with most sectors recovering losses from the previous week, following gains on Wall Street.
Durable Goods Orders in the US showed a solid recovery in April, increasing by 0.7% month-over-month, although March’s figure was revised down.
Australian Consumer Inflation Expectations for May fell to 4.1%, the lowest level since October 2021, indicating subdued inflation sentiment.
The S&P Global US Composite PMI surged to 54.4 in May, the highest level since April 2022, indicating strong output growth.
Geopolitical tensions, such as reports of Chinese military activities in the Taiwan Strait, may impact the Australian market due to the close trade relationship between China and Australia.
Technical Analysis and Outlook
The AUD/USD pair trades around 0.6630 on Monday, with the 14-day Relative Strength Index (RSI) showing a bullish bias. Analysis of the daily chart suggests the pair is testing the lower boundary of a rising wedge, with the nine-day Exponential Moving Average (EMA) at 0.6634 acting as immediate resistance.
A breakthrough above this level could propel the pair towards the four-month high of 0.6714, followed by the upper limit of the ascending triangle around 0.6730. Conversely, key support levels lie at 0.6600 and 0.6550, with a further decline potentially leading to a test of the throwback support region at 0.6470.
