Next upside follows 0.6800 and above

• AUD/USD added to Wednesday’s gains and flirted with 0.6700.
• The dollar retreated significantly on the back of labor and inflation data.
• Inflation expectations in Australia eased slightly in September.

The resumption of selling in the US dollar (USD) lent much-needed oxygen to the risk-on universe, fueling another positive day in the Aussie and sending AUD/USD higher in the vicinity of the 0.6700 neighborhood on Thursday.

Meanwhile, the Australian dollar managed to reverse some of the recent weakness against the US dollar, maintaining its positive outlook and supported by today’s 200-day SMA at 0.6617. However, occasional power outages in the green country and lingering concerns about China’s economic outlook present challenges to this optimism.

AUD/USD’s second day of gains was accompanied by another daily rally in copper prices, while iron ore prices fell slightly. Continued weakness in iron ore prices could limit further gains for the AUD, given the strong link to China’s economic performance.

Monetary policy developments have supported the Australian dollar’s recent uptrend, particularly in August. In this regard, the Reserve Bank of Australia (RBA) kept the official cash rate (OCR) at 4.35%, taking a cautious stance amid ongoing inflationary pressures with no signs of an immediate easing.

The AUD also found support from a dovish tone in the RBA’s latest minutes, which highlighted discussions among members on a potential increase in the cash rate target. The minutes highlighted persistent inflationary pressures and market expectations of possible rate cuts at the end of 2024.

Following suit, RBA Governor Michelle Bullock reiterated the bank’s dovish stance in her latest remarks, warning of the risks of high inflation. She indicated that if the economy progresses as expected, the Board does not anticipate having to cut rates in the near term.

However, RBA cash rate futures still show a high probability (around 85%) of a 25 basis point 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.

With the Federal Reserve (Fed) expected to implement almost full rate cuts and the RBA likely to maintain a tight policy stance for an extended period, AUD/USD could see further gains later this year.

However, the upside for the Australian dollar may be constrained 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 announce any significant new stimulus, raising concerns about demand in the world’s second largest economy.

Meanwhile, the latest CFTC report for the week ended September 3 showed that speculative net shorts fell to their lowest level in several weeks amid rising open interest, which could support some spot recovery. The AUD has remained in net-short territory since Q2 2021, except for a brief two-week period earlier this year.

On the data front, consumer inflation expectations fell to 4.4% in September (from 4.5%), according to the Melbourne Institute.

AUD/USD Daily Chart

AUD/USD Short-Term Technical Outlook

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

Sellers, on the other hand, could push the pair below its September low of 0.6622 (September 11) before touching the crucial 200-day SMA of 0.6617.

The four-hour chart shows a gradual recovery of the bullish position. That said, the 55-SMA at 0.6706 serves as immediate resistance, followed by the 100-SMA at 0.6734 and then 0.6767. On the other hand, the 200-SMA is at 0.6657 followed by 0.6622 and then 0.6560. The Relative Strength Index (RSI) rose to around 57.