The immediate conflict occurs at the 200-day SMA

• AUD/USD navigated an inconclusive range around 0.6650 on Monday.
• The dollar extended Friday’s strong post-NFP rally amid lower yields.
• Next to touch Down Under is the Westpac Consumer Confidence gauge.

The US dollar (USD) maintained its bullish trend, extending Friday’s advance after earnings and keeping the risk complex under pressure earlier in the week. Against this, AUD/USD flirted with the 100-day SMA near 0.6650, where some initial support appears to have resurfaced.

Although the Australian dollar closed the last two weeks in negative territory, it retains a positive outlook, supported by the crucial 200-day simple moving average (SMA) at 0.6615. However, the recent strengthening of the USD and continued concerns about China’s economic outlook challenge this optimism.

The swing tone in AUD/USD came on the back of solid gains in copper prices against marginal losses in iron ore prices. On the latter, continued weakness in iron ore prices could limit further gains for the AUD, given its strong correlation with China’s economic activity.

Recent monetary policy changes also supported the Aussie’s upward momentum, particularly in August. Unfortunately, the Reserve Bank of Australia (RBA) kept the official cash rate (OCR) at 4.35%, taking a cautious approach amid ongoing inflationary pressures with no immediate signs of easing.

Further confidence in the AUD came from a hawkish tone in the RBA’s latest minutes, which highlighted discussions among members on raising the cash rate target. The minutes highlighted ongoing inflationary pressures and market expectations of potential interest rate cuts at the end of 2024.

In addition, RBA Governor Michelle Bullock reaffirmed the bank’s stance on Wednesday, warning of the risks of high inflation. She noted that if the economy progresses as expected, the Board does not anticipate being able to lower rates in the near future.

Despite this, the RBA’s cash rate futures still suggest a high probability of around 85% of a 25bp cut by the end of the year.

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

However, with almost full rate cuts from the Federal Reserve (Fed) on the horizon and the RBA likely to maintain a tight policy for an extended period, AUD/USD could see further gains later this year.

However, the growth of the Australian dollar may be limited by the slow recovery of the Chinese economy. Issues such as deflation and insufficient stimulus are hampering China’s post-pandemic recovery. The latest Politburo meeting, while expressing support, did not introduce significant new stimulus measures, raising concerns about demand in the world’s second-largest economy.

Meanwhile, the CFTC’s latest report for the week ended Sept. 3 showed that speculative net shorts shrank to their lowest level in several weeks amid an increase in open interest that should support some recovery at in front of the place. The AUD has been in net-short territory since Q2 2021, with only a brief two-week exception earlier this year.

On the economic side, Australia’s consumer confidence print tracked by Westpac is due on September 10.

AUD/USD Daily Chart

AUD/USD Short-Term Technical Outlook

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

Sellers, on the other hand, may first push the pair below its September low of 0.6647 (September 9), ahead of the key 200-day SMA of 0.6615.

The four-hour chart shows a small retracement to the downtrend. However, 0.6689 lines up as immediate resistance, followed by 0.6767 and then 0.6791. On the other hand, the initial support level is 0.6647, before 0.6560 and then 0.6507. The RSI has returned to around 35.