Australian dollar advances on dovish comments from RBA Governor Bullock

• The Australian dollar is appreciating as the RBA may raise rates again if necessary.
• Safe haven flows may limit AUD gains amid escalating tensions in the Middle East.
• Fed Governor Michelle Bowman suggested the US central bank may not be ready to cut rates in September.

The Australian Dollar (AUD) recovers recent losses against the US Dollar (USD) on Monday. The AUD/USD pair appreciates due to driver sentiment around the Reserve Bank of Australia (RBA). Additionally, buoyant inflation in China, a close trading partner with Australia, may have provided support for the Australian dollar.

RBA Governor Michele Bullock last week highlighted the importance of remaining cautious on inflationary risks and expressed that the central bank would not hesitate to raise interest rates again to tackle inflation if necessary. The comments came just days after the RBA kept rates steady at 4.35% for the sixth consecutive meeting.

On the USD front, market expectations for a potential interest rate cut by the Federal Reserve (Fed) in September could put pressure on the US dollar (USD), potentially providing support for the AUD/USD pair.

Investors will likely focus on the set of US producer inflation data due on Tuesday and consumer inflation figures on Wednesday. Traders are looking for confirmation that price growth remains stable.

Daily Digest Market Movers: Aussie Dollar Rises on Demand RBA

• The upside of the risk-sensitive AUD could be limited due to refuge flows amid heightened geopolitical tensions in the Middle East. On Sunday, Defense Minister Yoav Gallant informed US Defense Secretary Lloyd Austin that Iran’s military activities indicate preparations for a significant strike on Israel, Axios writer Barak Ravid reported.
• On Sunday, Federal Reserve Governor Michelle Bowman said she continues to see upside risks to inflation and continued strength in the labor market. This suggests the Fed may not be ready to cut rates at their next meeting in September, according to Bloomberg.
• China’s consumer price index (CPI) rose 0.5 percent from a year ago in July, beating expectations of 0.3 percent and the previous reading of 0.2 percent. Meanwhile, the monthly index also rose 0.5 percent, swinging from a previous drop of 0.2 percent.
• Westpac has updated its RBA forecast, now predicting the first rate cut will take place in February 2025, a change from November 2024 previously anticipated. They also revised their terminal rate forecast to 3.35%, up from 3.10%. The RBA is now seen as more cautious, needing stronger evidence before considering rate cuts.
• On Thursday, Kansas City Fed President Jeffrey Schmid said easing monetary policy may be “appropriate” if inflation remains low. Schmid noted that the Fed’s current policy is “not that restrictive” and that while the Fed is close to its 2 percent inflation target, it has not yet fully achieved it, according to Reuters.
• Last week, Treasurer Jim Chalmers disputed the RBA’s view that the economy remains too robust and that large government budgets are contributing to prolonged inflation, according to Macrobusiness.
• RBA Governor Michele Bullock noted that the board was seriously considering raising the cash rate from 4.35% to 4.6% due to continued concerns about excess demand in the economy. In addition, RBA Chief Economist Sarah Hunter noted that the Australian economy was performing somewhat stronger than previously anticipated by the RBA.

Technical Analysis: Aussie hovers around 0.6600, aligns with support for pullback

The Australian dollar is trading around 0.6590 for the month. Daily chart analysis shows that the AUD/USD pair is positioned in an ascending channel, indicating an upward bias. Meanwhile, the 14-day Relative Strength Index (RSI) is consolidating below the 50 level. A move above this level could suggest a consolidation of bullish momentum.

In terms of resistance, the AUD/USD pair may test the upper limit of the ascending channel at the 0.6630 level. A breakout above this level could propel the pair towards the region near its six-month high of 0.6798.

On the downside, AUD/USD may find immediate support at the 0.6575 retracement level. A break below this level could reinforce a bearish trend, potentially pushing the pair towards the lower limit of the ascending channel around 0.6540. Additional support is seen at the retracement level at 0.6470.

AUD/USD: Daily chart