The Australian Dollar (AUD) appreciated on Monday despite improved risk aversion, supported by persistent high inflation, stronger Retail Sales, and an increase in the Services PMI. These factors have led the Reserve Bank of Australia (RBA) to delay potential rate cuts. However, renewed demand for the US Dollar (USD) is putting pressure on the AUD/USD pair.
RBA’s Cautious Stance on Inflation
The minutes from the RBA’s June meeting indicated that policymakers are staying vigilant against upside inflation risks. The significant rise in prices may necessitate higher interest rates. Although rates remained steady in June, May’s Consumer Price Index (CPI) unexpectedly increased to 4.0% from 3.6%, prompting warnings that the RBA might raise the cash rate to 4.6% in September.
US Dollar Faces Employment Growth Challenges
The US Dollar may face hurdles as US employment growth slowed in May, despite Nonfarm Payrolls (NFP) exceeding market expectations in June. The growth was slower compared to May’s increase, and the Unemployment Rate edged higher in June. This could lead traders to speculate that the Federal Reserve (Fed) might reduce interest rates sooner rather than later. The CME’s FedWatch Tool shows that rate markets are pricing in a 70.7% probability of a rate cut in September, up from 64.1% a week earlier.
Key Market Movers and Economic Indicators
US Nonfarm Payrolls (NFP) increased by 206,000 in June, following a rise of 218,000 in May, surpassing the market expectation of 190,000.
US Unemployment Rate rose to 4.1% in June from 4.0% in May, while Average Hourly Earnings decreased to 3.9% year-over-year in June from 4.1%, aligning with market expectations.
Australia’s Trade Surplus for May was A$5,773 million, lower than the expected A$6,678 million and down from A$6,548 million in the previous month.
Australia’s Retail Sales increased by 0.6% MoM in May, up from the previous month’s 0.1% rise, exceeding market expectations of a 0.2% increase.
Judo Bank’s Australia Services PMI increased to 51.2 MoM, up from 51.0, surpassing the forecasted drop to 50.6. The Composite PMI rose to 50.7 MoM from 50.6.
China’s Services PMI fell from 54.0 in May to 51.2 in June, according to Caixin, against the market forecast of 53.4.
Comments from Federal Reserve Officials
Federal Reserve Bank of Chicago President Austan Goolsbee stated that bringing inflation back to 2% will take time and more economic data are needed. Fed Chair Jerome Powell mentioned that the central bank is on the disinflationary path.
Technical Analysis: AUD/USD Outlook
The Australian Dollar trades around 0.6740 on Monday. The analysis of the daily chart shows the AUD/USD pair breaking below a rising wedge, indicating a potential bearish reversal. Additionally, the 14-day Relative Strength Index (RSI) consolidates slightly below the 70 level, suggesting the asset may undergo a correction.
The AUD/USD pair is likely to test the lower boundary of the rising wedge around 0.6755, followed by the psychological level of 0.6800 near the upper boundary of the wedge. On the downside, the AUD/USD pair may navigate the region around the 50-day Exponential Moving Average (EMA) at 0.6639.
Conclusion
The Australian Dollar’s recent appreciation is buoyed by strong domestic economic indicators and a cautious RBA stance on inflation. However, the rising demand for the US Dollar amidst fluctuating employment growth and potential Fed rate cuts continues to exert pressure on the AUD/USD pair. Market participants will closely watch the evolving economic landscape and central bank policies for further direction.
Related Topics:
