Additional earnings remain on the table in the short term

• AUD/USD resumed its uptrend and reached just below 0.6800.
• The dollar traded inconclusive following the US holiday.
• Chinese business activity in the manufacturing sector disappointed in August.

AUD/USD regained momentum at the start of the week, managing to come within a few steps of the key 0.6800 level. This upward move in the Australian dollar followed an inconclusive start to the week in the US dollar (USD), following inactivity in US markets due to the Labor Day holiday.

Despite the ongoing consolidation theme, the pair’s upside momentum remains strong, supported by the break of the key 200-day SMA at 0.6614, which has changed the short-term outlook for AUD/USD to a clearly bullish position.

The AUD’s recovery over the past month, meanwhile, has been driven mainly by a weakening greenback and improving conditions for risk assets.

However, Monday’s rise came despite further declines in copper and iron ore prices, particularly after the release of data from China over the weekend. That said, the sharp drop in iron ore prices is likely to limit the AUD’s upward momentum. In addition, iron ore futures fell more than 3 percent overnight, partly due to worsening property sales data in China, while weak economic activity in the country continued to weigh on iron ore prices.

More troubling data pushed China’s official composite PMI to 50.1 in August, pointing to stagnant growth. The breakdown showed a deeper contraction in manufacturing (49.1) and a slight increase in non-manufacturing (50.3). In particular, the Caixin private manufacturing PMI improved to 50.4 in August from 49.8 in July.

Recent monetary policy developments have also supported the Australian dollar’s multi-week rally. The Reserve Bank of Australia (RBA) recently decided to keep the official cash rate (OCR) steady at 4.35%, taking a cautious approach amid ongoing domestic inflationary pressures and showing no clear intention to ease policy anytime soon.

In a later speech, Governor Michelle Bullock reiterated that the RBA is ready to raise interest rates further if necessary to control inflation, maintaining a dovish stance due to high underlying inflation. She stressed that the bank remains vigilant about inflation risks after deciding to keep rates unchanged.

Further optimism around the AUD was further boosted by the dovish tone of the RBA’s latest minutes, which revealed a debate among members over the cash rate target hike. The minutes highlighted persistent inflationary pressures and market expectations of possible rate cuts at the end of 2024.

Also lining up behind a hawkish narrative, RBA Deputy Governor Andrew Hauser said they were not yet as confident that Australian inflation was on a sustainable path back to target. As a result, he indicated that rates should be held constant for now.

However, a drop in the Melbourne Institute’s inflation gauge to a three-year low of 2.5% year-on-year in August suggests the possibility of a lower RBA cash rate by the end of the year. Futures markets are currently pricing in a roughly 66% chance of a 25bps cut by December.

The RBA is currently expected to be the last of the G10 central banks to start cutting rates.

However, with potential Fed rate cuts in the near future and the likely extended period of RBA tightening, AUD/USD looks poised for further strength in the coming months.

Despite this, gains for the Australian dollar may be limited due to the slow and gradual recovery of the Chinese economy. Deflation and insufficient stimulus are hampering China’s post-pandemic recovery. The latest Politburo meeting failed to announce substantial new stimulus measures despite voicing support, adding to worries about demand in the world’s second-largest economy.

Meanwhile, the CFTC’s latest report for the week ended August 27 showed that speculators remained net short on the AUD, although they halved their contracts from the previous week. The AUD has been in net-short territory since Q2 2021, with only a brief two-week hiatus earlier this year.

On the data front, Down Under, the final Judo Bank Manufacturing PMI edged down slightly from the preliminary print to 48.5, although it was higher than July’s reading.

AUD/USD Daily Chart

AUD/USD Short-Term Technical Outlook

Further gains are expected to propel AUD/USD to the August high of 0.6823 (29 August), ahead of the December 2023 peak of 0.6871 (28 December) and the 0.7000 level.

Occasional bear attempts, on the other hand, may lead to an initial drop to the temporary 55-day SMA of 0.6663, before the significant 200-day SMA of 0.6614 and 0.6347 in 2024 (August 5 ).

The four-hour chart illustrates the continuation of range trading. However, the immediate resistance level is 0.6823, ahead of 0.6871. On the other hand, initial support comes at 0.6751 before the 100-SMA at 0.6706 and 0.6697. The RSI rose to around 54.