Aussie dollar gains on risk-on sentiment amid increasing chances of Fed rate cut

• AUD/USD is up as US data reinforces the likelihood that the Fed will cut interest rates next week.
• The US producer price index rose more than expected, driven by higher costs of services.
• The Fed is expected to cut interest rates by 25 basis points at its September meeting.

AUD/USD extended for a third straight session on Friday as economic data from the United States (US) strengthened the possibility that the Federal Reserve (Fed) will cut interest rates next week.

The US Labor Department reported that initial jobless claims for the previous week rose as expected, beating the previous week’s numbers. In addition, US factory inflation rose more than expected, driven by higher service costs.

US consumer price index (CPI) data for August showed headline inflation fell to a three-year low, although core inflation beat expectations. This development has increased the likelihood that the Federal Reserve (Fed) will begin its easing cycle with a 25 basis point interest rate cut in September. Investors are turning their attention to the Michigan consumer sentiment index, which is scheduled for Friday.

Daily Digest Market Movers: Australian dollar extends higher on improved risk sentiment

• The U.S. producer price index (PPI) rose 0.2% month-on-month in August, beating forecasts for a 0.1% rise and the previous 0.0%. Meanwhile, the core PPI accelerated to 0.3% on the month, versus the expected 0.2% increase and the 0.2% contraction in July.
• US initial jobless claims rose slightly in the week ended September 6, rising to an expected 230,000 from the previous reading of 228,000.
• Former Reserve Bank of Australia (RBA) governor Bernie Fraser has criticized the current RBA board for focusing too much on inflation at the expense of the labor market. Fraser suggested the Council should cut the cash rate, warning of “recession risks” that could have serious consequences for employment.
• Australian consumer inflation expectations fell to 4.4% in September, down slightly from August’s peak of 4.5%. This decline highlights the central bank’s efforts to balance reducing inflation within a reasonable timeframe and maintaining gains in the labor market.
• The US consumer price index fell to 2.5% from a year earlier in August, from the previous reading of 2.9%. The index fell below the expected value of 2.6%. Meanwhile, headline CPI was 0.2% on the month.
• Core US CPI, excluding food and energy, was unchanged at 3.2% y-o-y. On a monthly basis, the core CPI rose to 0.3% from the previous reading of 0.2%.
• The first US presidential debate between former President Donald Trump and Democratic nominee Kamala Harris of Pennsylvania has been won by Harris, according to a CNN poll. The debate began with a critical focus on the economy, inflation and economic policies.
• On Wednesday, Reserve Bank of Australia (RBA) deputy governor for economics Sarah Hunter noted that high interest rates are suppressing demand, which is expected to lead to a mild economic recession. Hunter also pointed out that the labor market remains tight relative to employment levels, with employment growth expected to continue, albeit slower than population growth, according to Reuters.

Technical analysis: The Australian dollar is moving above 0.6700, the nine-day EMA

AUD/USD is trading near 0.6730 on Friday. Technical analysis of the daily chart indicates that the pair has broken above the descending channel, signaling a bearish trend. Additionally, the 14-day Relative Strength Index (RSI) has moved above the 50 level, suggesting a change in momentum from a bearish to an uptrend.

On the other hand, the AUD/USD pair may explore the region around its seven-month high of 0.6798, aligned with a psychological level of 0.6800.

On the downside, AUD/USD could find immediate support around the upper boundary of the descending channel near 0.6720, followed by the nine-day EMA at 0.6707.

A return to the descending channel would strengthen the bearish trend and lead the pair to navigate the region around the lower boundary of the descending channel around 0.6600, followed by the support area for the reversal near 0.6575.

AUD/USD: Daily chart