The Australian Dollar (AUD) continued to gain against the US Dollar (USD) on Tuesday, buoyed by key domestic economic data and hawkish sentiment surrounding the Reserve Bank of Australia (RBA). This upward momentum in the AUD/USD pair is underpinned by Australia’s Westpac Consumer Confidence Index, which rebounded by 2.8% in August, following a 1.1% decline in July. Additionally, the Wage Price Index showed a steady increase of 0.8% in the second quarter, slightly below the anticipated 0.9% rise.
The AUD/USD pair’s appreciation is further supported by challenges facing the US Dollar, particularly due to growing speculation about a potential interest rate cut by the Federal Reserve (Fed) in September. However, the pressure on the USD might be tempered by diminishing prospects of a more aggressive 50-basis point rate cut at the Fed’s upcoming meeting.
Market participants are now turning their attention to the US producer inflation data, set to be released on Tuesday, and consumer inflation figures on Wednesday. These data points are crucial for confirming whether price growth remains stable.
Market Movers: RBA’s Hawkish Stance Fuels Australian Dollar’s Rise
On Monday, RBA Deputy Governor Andrew Hauser highlighted that persistent inflation is driven by weaker supply and a tight labor market. He also noted significant uncertainty surrounding economic forecasts, which contributes to the hawkish mood. Despite the AUD’s recent gains, geopolitical tensions in the Middle East could curb its upward trajectory as safe-haven flows strengthen. Defense Minister Yoav Gallant’s warning to US Defense Secretary Lloyd Austin about Iran’s military preparations underscores the growing geopolitical risks.
Meanwhile, Federal Reserve Governor Michelle Bowman emphasized the ongoing risks of inflation and labor market strength, signaling that the Fed might not be ready to cut rates in September. This stance, reported by Bloomberg, could also impact the USD’s trajectory.
In China, the Consumer Price Index (CPI) for July rose 0.5% year-on-year, surpassing expectations and previous readings. This increase suggests some stabilization in China’s economy, which could indirectly influence the AUD/USD pair.
Westpac has updated its RBA forecast, now predicting the first rate cut in February 2025, rather than November 2024 as previously expected. The bank also revised its terminal rate forecast to 3.35%, reflecting a more cautious outlook from the RBA, which appears to be awaiting stronger evidence before considering any rate cuts.
Adding to this outlook, Kansas City Fed President Jeffrey Schmid indicated that easing monetary policy could be “appropriate” if inflation remains low. However, he also noted that the Fed’s current policy stance is not overly restrictive, as the central bank approaches its 2% inflation target.
Last week, Treasurer Jim Chalmers challenged the RBA’s assessment that the economy is too robust and that large government budgets are prolonging inflation. This dispute underscores the complexity of the economic environment that the RBA is navigating.
RBA Governor Michele Bullock reiterated that the central bank would not hesitate to raise rates further if necessary to combat inflation. Her comments followed the RBA’s decision to hold rates steady at 4.35% for the sixth consecutive meeting.
Technical Analysis: AUD/USD Tests Key Support at 0.6590
The Australian Dollar is trading around 0.6590 on Tuesday, hovering near the throwback support level of 0.6575. The daily chart indicates that the AUD/USD pair is steady within an ascending channel, pointing to a bullish bias. However, the 14-day Relative Strength Index (RSI) remains below the 50 mark, suggesting consolidation rather than a strong upward momentum.
Should the AUD/USD pair break above the 0.6660 level, it may challenge the six-month high of 0.6798, recorded on July 11. Conversely, a drop below the immediate support at 0.6575 could shift the bias toward bearish, with potential declines toward the lower boundary of the ascending channel at 0.6560 and further down to 0.6470.
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