It looks poised to break above 0.6800 and retest the YTD pre-Fed high

• AUD/USD regains positive traction on Monday amid Fed-inspired USD selling.
• Bets on more Fed rate cut to keep US bond yields lower and weigh on money.
• Disappointing Chinese data released over the weekend does not stop the move up.
• Investors are now eagerly awaiting Wednesday’s crucial FOMC decision for a boost.

The AUD/USD pair is pulling some buyback on the first day of a new week and is returning closer to a one-week high around the 0.6730-0.6735 region reached on Friday. The Australian Dollar (AUD) continues to draw support from the Reserve Bank of Australia’s (RBA) dovish stance. RBA governor Michele Bullock reiterated on Thursday that bringing inflation down to the 2-3% target range remained the central bank’s top priority and it was premature to consider short-term interest rate cuts as inflation remained too high . This, along with the prevailing selling trend in the US Dollar (USD), is proving to be a key factor acting as a tailwind for the currency pair.

The weaker-than-expected US Consumer Price Index (CPI) and Producer Price Index (PPI) reports released last week provided further evidence of easing inflationary pressures. This raised market expectations for more aggressive policy easing by the Federal Reserve (Fed). According to CME Group’s FedWatch tool, the market’s current price points to a more than 50% chance that the US central bank will cut borrowing costs by 50 basis points later this week. This keeps US Treasury yields and the USD index (DXY) near 2024 lows. Apart from that, a generally positive risk tone undercuts safe-haven money and benefits the risk-sensitive Aussie.

AUD bulls, meanwhile, seem fairly unfazed by a string of weak Chinese data released over the weekend. Data from the National Bureau of Statistics reported that China’s retail sales rose 2.1 percent in August from a year earlier, down from 2.7 percent growth the previous month and missing expectations. In addition, industrial production growth slowed from 5.1% in July to 4.5% in the reported month. Moreover, fixed asset investment rose 3.4% for the January-August period, slower than market forecasts, and the unemployment rate unexpectedly rose to a six-month high. This, however, does little to dampen the bullish tone surrounding Australia’s proxy China.

The aforementioned fundamental backdrop appears tilted in favor of bullish traders and supports the prospects for an extension of the recent move up from the monthly low around the 0.6620 area reached last week. Investors, however, could refrain from positioning for any further appreciation moves and opt to sideline ahead of the central bank’s key event risk. The Fed is scheduled to announce its policy decision on Wednesday, which will play a key role in influencing the USD and determining the short-term trajectory for the AUD/USD pair. Meanwhile, traders on Monday will take cues from the release of the US Empire State Manufacturing Index.

Technical perspectives

Technically, the recent good bounce from the all-important 200-day simple moving average (SMA) and subsequent strength beyond the 0.6700 mark validates the positive outlook for the AUD/USD pair. Furthermore, the oscillators on the daily chart have just started to gain positive traction and suggest that the path of least resistance for spot prices is up. Therefore, some tracking strength towards the 0.6765-0.6770 intermediate hurdle, en route to the 0.6800 mark and the 0.6825 area, or the multimonth peak reached in August, seems a distinct possibility.

On the other hand, the round figure of 0.6700 now appears to protect the downside immediately ahead of the 100-day SMA, currently pinned near the 0.6655-0.6650 region and the 0.6620-0.6615 area or 200-day SMA days. A convincing break below the latter will shift the bias in favor of bear traders and pull the AUD/USD pair below the 0.6570-0.6565 intermediate support towards challenging the 0.6500 psychological mark.

AUD/USD Daily Chart