Inflation data holds the key

• AUD/USD resumed its uptrend and approached the 0.6800 barrier.
• The dollar jitters underpinned the Aussie’s daily gains.
• Markets are focused on the inflation figures due to be announced on 28 August.

AUD/USD slipped back around the key 0.6800 level on Tuesday, although it managed to hang on to decent gains for the day as the US dollar (USD) saw sellers return to the market.

Meanwhile, the pair’s upside momentum remains intact, supported by a recent break above the 200-day SMA at 0.6609, which has turned the short-term outlook for AUD/USD bullish.

Even though the pair has risen for three consecutive weeks, it is facing stiff resistance around the 0.6800 level. The continued monthly recovery was driven primarily by a weaker greenback and a broader recovery in risk assets.

Also contributing to the Australian dollar’s gains, copper prices rose to multi-week highs, while iron ore prices rose slightly.

Monetary policy developments have also supported the Australian dollar of late. The Reserve Bank of Australia (RBA) recently kept the official cash rate (OCR) at 4.35%, opting for caution, with no immediate plans to ease policy due to persistent domestic inflationary pressures. Both average core inflation and headline CPI inflation are now expected to reach the 2-3% target range by the end of 2026, later than previously anticipated.

In a later speech, Governor Michelle Bullock reiterated the RBA’s willingness to raise interest rates if necessary to control inflation, maintaining a dovish stance amid elevated underlying inflation. She emphasized the bank’s vigilance on inflation risks following the decision to keep rates unchanged. Core inflation, which was 3.9% in the last quarter, is expected to reach the target range of 2-3% by the end of 2025.

The bullish sentiment around the AUD was further bolstered by the dovish tone of the RBA Minutes published last week, where members debated whether to raise the cash rate target or keep it unchanged. The case for a hike was driven by ongoing underlying inflation and the need to counter market expectations of multiple rate cuts later in 2024. Ultimately, members agreed that maintaining the current target for the cash rate is the best course of action. They also noted that a near-term rate cut is unlikely, although future rate adjustments remain on the table.

Overall, the RBA is expected to be the last of the G10 central banks to start cutting interest rates.

Expectations of imminent Federal Reserve (Fed) easing have led traders to speculate that the RBA could cut rates at some point in Q4, with rates around 50%. However, this decision remains uncertain as it will depend heavily on future data. The July inflation report due this week is expected to show a sharp slowdown in headline inflation to 3.4 percent, down from 3.8 percent, largely due to government cuts in electricity bills.

However, the possibility of the Fed cutting interest rates in the near term, in contrast to the RBA’s likely prolonged tightening stance, should support a stronger AUD/USD in the coming months.

However, the Australian dollar’s gains could be limited by a slow recovery in the Chinese economy. China continues to struggle with post-pandemic issues such as deflation and inadequate stimulus. Concerns about demand in China, the world’s second-largest economy, intensified following the Politburo meeting, which, despite promises of support, did not introduce new specific stimulus measures.

Meanwhile, the CFTC’s latest report for the week ended August 20 shows that speculators remain largely unshorted on the AUD, although they have trimmed their positions to three-week lows. Net shorts have dominated since Q2 2021, with only a brief two-week break so far this year.

AUD/USD Daily Chart

AUD/USD Short-Term Technical Outlook

Further gains are likely to push AUD/USD to the August high of 0.6798 (23 August) ahead of the December 2023 peak of 0.6871 (28 December).

Occasional bear attempts, on the other hand, may lead to an initial drop to the temporary 55-day SMA of 0.6652, before the significant 200-day SMA of 0.6609 and 0.6347 in 2024 (August 5 ).

The four-hour chart shows the re-emergence of some consolidation. That said, the immediate resistance level is 0.6798, ahead of 0.6871. On the other hand, 0.6697 is first, followed by the 200-SMA at 0.6637 and then 0.6560. The RSI rose around 61.