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Other gains are emerging

  • AUD/USD resumed its uptrend further north of the 0.6700 hurdle.
  • The dollar maintained its negative performance ahead of the Fed event.
  • The Federal Reserve could surprise and cut rates by 50 bps.

Renewed selling pressure on the US dollar (USD) gave a boost to risk-sensitive assets, helping the Australian dollar gain traction and prompting AUD/USD to recover the 0.6700 barrier and above.

That said, the Aussie managed to recoup some of Friday’s losses against the USD, always on the back of the broad constructive outlook. Despite this positive price action, the AUD faces challenges due to intermittent greenback strength and continued concerns about China’s economic performance.

In fact, Monday’s strong rally in AUD/USD was also accompanied by a further increase in copper prices, while iron ore prices fell slightly. As iron ore prices are closely linked to China’s real estate and industrial sectors, weakness in these could limit further gains for the AUD.

Monetary policy developments have supported the Australian dollar recently. In August, the Reserve Bank of Australia (RBA) kept the official cash rate (OCR) at 4.35%, taking a cautious approach amid persistent inflationary pressures with no signs of an immediate easing.

The latest RBA minutes also supported the AUD, revealing discussions among members about a possible increase in the cash rate target. The minutes highlighted ongoing inflation concerns and market expectations for potential rate cuts in late 2024.

In the same vein, RBA Governor Michelle Bullock reiterated the bank’s dovish stance in her recent comments, warning of the risks of high inflation. She indicated that if the economy follows the expected path, the Council does not foresee the need to cut rates in the near term.

However, RBA cash rate futures still point to a high probability (around 85%) of a 25 basis point cut by the end of the year. The RBA is widely expected to be the last of the G10 central banks to start cutting rates.

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

However, a major headwind for further gains in the Australian dollar could be limited by the slow recovery of the Chinese economy. Deflation and insufficient stimulus measures are hampering China’s post-pandemic recovery, and the latest Politburo meeting, while expressing support, did not announce any significant new stimulus, raising concerns about demand in the second largest world economy.

Additionally, the CFTC’s latest report for the week ended September 10 showed that speculative net shorts in the Aussie rose to two-week highs amid a decent rebound in open interest. It’s worth noting that the AUD has remained in net-short territory since Q2 2021, with only a brief two-week period of net-long positioning earlier this year.

In terms of dates, the next release in Oz will be the Westpac Leading Index on September 18th.

AUD/USD Daily Chart

AUD/USD Short-Term Technical Outlook

Further gains will take AUD/USD to the August peak of 0.6823 (29 August), followed by the December 2023 peak of 0.6871 (28 December) and finally to the key barrier of 0.7000.

Sellers, on the other hand, could drive the pair below its September low of 0.6622 (September 11), an area supported by the key 200-day SMA of 0.6618. From here comes the 2024 low of 0.6347 (August 5).

The four-hour chart suggests a gradual strengthening of the bullish stance. That said, the 0.6748 level appears as the initial upside barrier, followed by 0.6767 and then 0.6823. On the downside, the provisional 55-SMA is at 0.6696 before the 200-SMA of 0.6668 and then at 0.6622. The RSI hovered around the 62 region.

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