The AUD/USD pair extends its gains for the third consecutive session on Friday, buoyed by economic data from the United States (US) that heighten expectations of a significant interest rate cut by the Federal Reserve (Fed) next week.
Recent data from the US Labor Department revealed a rise in Initial Jobless Claims, meeting expectations, and a higher-than-forecasted increase in factory inflation due to elevated service costs. Investors are now awaiting the Michigan Consumer Sentiment Index, scheduled for release later today.
According to the CME FedWatch Tool, markets are now fully expecting at least a 25 basis point (bps) rate cut from the Federal Reserve at its September meeting. The probability of a 50 bps cut has surged to 41.0%, a dramatic rise from 14.0% the previous day.
In contrast, the Australian Dollar (AUD) has been supported by a hawkish stance from Reserve Bank of Australia (RBA) Governor Michele Bullock, who indicated last week that it is premature to consider rate cuts given ongoing high inflation.
Market Movers: Australian Dollar Benefits from Risk Appetite
The US Producer Price Index (PPI) for August rose 0.2% month-on-month (MoM), exceeding the forecasted 0.1% and the previous month’s 0.0%. The core PPI accelerated to 0.3% MoM, surpassing the expected 0.2% rise and reversing July’s 0.2% contraction. Meanwhile, Initial Jobless Claims for the week ending September 6 increased slightly to 230K from 228K.
Former RBA Governor Bernie Fraser has criticized the current RBA Board for focusing excessively on inflation at the expense of the job market. Fraser suggested a rate cut could mitigate “recessionary risks” that might severely impact employment.
Australia’s Consumer Inflation Expectations eased to 4.4% in September, down from August’s four-month high of 4.5%. This decline reflects the central bank‘s efforts to manage inflation while supporting labor market gains.
In the US, the Consumer Price Index (CPI) fell to 2.5% year-on-year (YoY) in August, from 2.9% previously, falling short of the expected 2.6%. Core CPI, excluding food and energy, remained steady at 3.2% YoY, with a monthly increase to 0.3% from 0.2%.
The first US presidential debate between former President Donald Trump and Democratic nominee Kamala Harris focused on the economy and inflation, with Harris emerging as the CNN-poll winner.
Sarah Hunter, RBA Assistant Governor for Economics, noted that high interest rates are likely to suppress demand, leading to a mild economic downturn, though the labor market remains tight with employment growth expected to continue, albeit slower than population growth.
Technical Analysis: AUD/USD Breaks Out
The AUD/USD pair is trading around 0.6730 on Friday. Technical analysis shows the pair has broken above a descending channel, indicating a weakening bearish trend. The 14-day Relative Strength Index (RSI) has also risen above the 50 mark, suggesting a shift from bearish to bullish momentum.
On the upside, the pair may target its seven-month high of 0.6798, approaching the psychological 0.6800 level. On the downside, immediate support is seen around the upper boundary of the descending channel at 0.6720, followed by the nine-day Exponential Moving Average (EMA) at 0.6707.
A return to the descending channel could reinforce the bearish bias, potentially driving the pair towards the lower boundary around 0.6600, with additional support near 0.6575.
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