AUD/USD Outlook: Dollar softens ahead of key US inflation data

• The core US PCE price index will show whether price pressures are easing fast enough to justify a 50 bps rate cut.

• US GDP rose a more than expected 3.0% in the second quarter.

• Australia’s sales were flat in July, down from earlier robust figures.

The AUD/USD outlook is bullish as the greenback eases ahead of US inflation data, which will shape the outlook for Fed rate cuts. Meanwhile, expectations for an RBA rate cut remained unchanged after data showed weaker retail sales in July.

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AUD/USD rose on Friday as investors braced ahead of the core PCE price index report. The inflation measure will show whether price pressures are easing fast enough to justify a 50 bps rate cut. If not, the Fed will likely resort to a reduction of less than 25 bps. In addition, markets will begin to price in a gradual rate cut cycle.

On Thursday, US data revealed a robust economy. GDP expanded a stronger-than-expected 3.0% in the second quarter, raising the odds that the Fed will get a soft landing. At the same time, initial jobless claims came in lower than expected, pointing to a still-tight labor market. As a result, the dollar rose.

Meanwhile, data on Friday showed Australian sales were flat in July, down from earlier robust readings. Meanwhile, economists had expected a 0.3 percent increase. In June, retail sales rose 0.5%. The disappointing numbers have raised the likelihood that the Reserve Bank of Australia’s next move will be a rate cut.

However, after July’s upbeat inflation report, RBA rate cut expectations remained subdued. Investors value an 80% chance of a rate cut in December. Meanwhile, policymakers are forecasting the first cut sometime next year.

Key AUD/USD events today

• US PCE core price index m/m

AUD/USD Technical Outlook: Price pauses as bullish momentum fades

Technically, AUD/USD is trading in a tight range near the critical psychological level of 0.6800. However, the trend is bullish as the price is above the 30-SMA. At the same time, the RSI is trading in bullish territory above 50.

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However, the RSI showed weakness in the uptrend. It made a bearish divergence, a sign that the pair could be ready to turn to the downside. If bears emerge, they could push the price below the 30-SMA to reverse the trend. Otherwise, the bulls will regain momentum and move above 0.6800 to make a higher high.

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