The Australian Dollar (AUD) has appreciated against the US Dollar (USD) following remarks from Reserve Bank of Australia (RBA) Governor Michele Bullock on Thursday. Bullock emphasized the necessity of remaining vigilant regarding inflation risks and expressed a readiness to hike rates if necessary, indicating that inflation might not return to the 2–3% target range until the end of 2025. This sentiment, combined with the RBA’s hawkish decision to maintain the cash rate at 4.35% on Tuesday, has boosted the AUD/USD pair.
Conversely, the US Federal Reserve (Fed) is expected to adopt a more aggressive rate-cutting approach starting in September, driven by weaker employment data from July, which has intensified concerns about a potential US recession. According to the CME FedWatch tool, there is now a 72.0% probability of a 50-basis point (bps) interest rate cut by the Fed in September, a significant increase from 11.8% a week earlier. These expectations of deeper rate cuts are likely to exert downward pressure on the US Dollar in the near term.
Market Dynamics: Australian Dollar Rises Amid RBA’s Hawkish Tone
Despite its recent strength, the Australian Dollar might face challenges due to rising risk aversion linked to escalating tensions in the Middle East. US intelligence officials have reported that Iran and its allies are preparing potential retaliation against Israel following the recent killings of top military figures associated with Hezbollah and Hamas. Such geopolitical risks could impact market sentiment and, consequently, the AUD.
China’s Trade Balance for July showed a surplus of $84.65 billion, below the expected $99 billion. Exports grew by 7.0% year-over-year (YoY), missing the 9.7% forecast, while imports rose by 7.2% YoY, surpassing the expected 3.5%. Given the close trade relationship between China and Australia, any economic shifts in China could significantly impact the Australian market.
The AiG Australian Industry Index indicated a slight easing in contraction in July, improving to -20.7 from -25.6. However, the index has been in contraction for the past twenty-seven months. On Wednesday, Treasurer Jim Chalmers challenged the RBA’s assessment that the Australian economy remains overly robust, attributing prolonged inflation to large government budgets.
RBA Governor Michele Bullock revealed that the board had seriously considered raising the cash rate from 4.35% to 4.6% due to persistent concerns about excess demand. RBA Chief Economist Sarah Hunter also noted that the Australian economy is performing somewhat stronger than previously anticipated.
US Federal Reserve Outlook
Federal Reserve Bank of San Francisco President Mary Daly expressed increased confidence on Monday that US inflation is moving towards the Fed’s 2% target, acknowledging that the risks to the Fed’s mandates are becoming more balanced. Chicago Fed President Austan Goolsbee emphasized the Fed’s readiness to act if economic or financial conditions deteriorate, underscoring a proactive approach to potential economic challenges.
Technical Analysis: Australian Dollar Hovering Around 0.6550
The Australian Dollar is trading around 0.6530 on Thursday. Technical analysis of the daily chart indicates that the AUD/USD pair is consolidating above the descending channel, suggesting a weakening bearish bias. The 14-day Relative Strength Index (RSI) is rising from the oversold 30 level, indicating potential for further upward movement.
Support for the AUD/USD pair is expected at the upper boundary of the descending channel around 0.6470. A break below this level could exert downward pressure, potentially testing the lower boundary of the channel around 0.6420. On the upside, the nine-day Exponential Moving Average (EMA) at 0.6535 serves as immediate resistance, with additional resistance at 0.6575. A breakout above this level could propel the pair toward a six-month high of 0.6798.
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