Bulls need to break above 0.6800 to allow further gains

• AUD/USD partially pared Friday’s sharp advance, hovering around 0.6800.
• The decent dollar recovery caused the decline in the AUD.
• Investors’ attention now turns to inflation figures due later in the week.

AUD/USD fell short of the key 0.6800 barrier on Monday, retreating modestly amid a welcome recovery in the US dollar (USD), which regained some balance following Friday’s pronounced Powell-induced sell-off.

The pair’s bullish momentum, however, appears intact, supported by the recent breakout above the significant 200-day SMA at 0.6608, which has changed the outlook for AUD/USD to a near-term bullish one.

Despite the three-week rally, the pair has so far encountered strong resistance around the 0.6800 area. It’s worth noting that the current monthly rally has been largely fueled by the greenback’s consistent weakening and a broader recovery in risk assets.

However, equally robust growth in the commodity mix remains to be seen. Finally, copper prices rose to multi-week highs on Monday, while iron ore prices fell marginally.

Monetary policy developments also supported the Australian dollar. Indeed, the Reserve Bank of Australia (RBA) recently kept the official cash rate (OCR) at 4.35%, taking a cautious stance with no immediate plans to ease policy given ongoing 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, which is later than previously anticipated.

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

The bullish sentiment around the AUD was also reinforced 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 underpinned by ongoing core inflation and the need to counter market expectations of multiple rate cuts later in 2024. Ultimately, members decided that maintaining the current cash rate target was the most good option. They also agreed that a near-term rate cut is unlikely, although future adjustments to the target rate remain possible.

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

Expectations of Federal Reserve (Fed) easing have led traders to speculate that the RBA could cut rates as early as November, with around a 50% chance. A rate cut by the end of the year is fully anticipated. This decision remains uncertain, however, as much will depend on future dates. The July inflation report, due later this week, is expected to reveal a sharp slowdown in headline inflation to 3.4%, down from 3.8%, largely due to government cuts to electricity bills.

That said, the potential for interest rate cuts by the Fed in the near term, in contrast to the RBA’s expected prolonged tightening stance, should support a stronger AUD/USD in the coming months.

However, a slow recovery in the Chinese economy may limit the Australian dollar’s gains. China continues to face post-pandemic challenges such as deflation and inadequate stimulus. Concerns about demand in China, the world’s second-largest economy, were heightened following the Politburo meeting, which, despite pledges of support, did not introduce new specific stimulus measures.

Meanwhile, the latest CFTC report for the week ended August 20 reveals that speculators remained mostly short of the AUD, although they reduced 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 will take AUD/USD to the August peak of 0.6798 (23 August), ahead of the December 2023 high of 0.6871 (28 December).

On the other hand, occasional bearish efforts may cause an initial drop to the temporary 55-day SMA of 0.6649, before the crucial 200-day SMA of 0.6608 and the 2024 low of 0.6347 (August 5) .

The four-hour chart indicates that there has been some lack of upward momentum recently. However, the immediate resistance level is 0.6798, which comes ahead of 0.6871. On the other hand, 0.6607 is first before the 200-SMA at 0.6637 and finally 0.6560. The RSI hovered around 67.