Next on tap comes 0.6800

• AUD/USD added to the weekly uptrend and retested 0.6790.
• The dollar traded on the defensive as investors awaited the Fed.
• The Fed is expected to cut rates later on Wednesday.

Further selling in the US dollar (USD) provided further support to the risk-on space on Wednesday, with AUD/USD extending its bullish momentum for a third consecutive day and flirting with three-week highs just below 0.6800.

However, gains in the Australian dollar are expected to be tested in light of the Fed’s upcoming interest rate decision, where the size of the rate cut still remains uncertain.

The Australian dollar’s decent advance on Wednesday came alongside a brief rally in copper prices, although iron ore saw a slight rebound. Given iron ore’s strong links to China’s real estate and industrial sectors, this vulnerability may limit upside potential for the Australian dollar in the short to medium term.

Meanwhile, the Reserve Bank of Australia’s (RBA) current monetary policy stance supported the Australian dollar’s uptrend. In August, the RBA kept the official cash rate (OCR) steady at 4.35%, opting for a cautious stance amid persistent inflationary pressures. The RBA’s latest minutes have been particularly hawkish, revealing talk of potential rate hikes due to continued inflation concerns, despite market expectations of rate cuts in late 2024.

In recent remarks, RBA Governor Michelle Bullock reiterated her cautious stance, highlighting the risks posed by high inflation and suggesting that rate cuts are unlikely in the near term. However, market futures point to around an 85% chance of a 25 basis point cut by the end of the year, suggesting the RBA could be among the last G10 central banks to initiate rate cuts.

Looking ahead, with the Federal Reserve’s expected interest rate cuts already largely priced in and the RBA likely to maintain restrictive policies for some time, the AUD/USD pair could see further gains later this year.

However, the slow recovery of the Chinese economy remains a significant obstacle. Deflation and inadequate stimulus measures are hampering China’s post-pandemic recovery, and the recent Politburo meeting, while supportive, failed to introduce any major stimulus initiatives, raising concerns about future demand from the second largest world economy.

Additionally, the latest CFTC report, covering the week ended September 10, revealed that speculative net short positions in the Australian dollar hit two-week highs, accompanied by an increase in open interest. As of Q2 2021, the AUD has remained predominantly in net short territory, with only a brief shift to net long positioning earlier this year.

Going forward, the next key data point for Australia will be the Westpac Leading Index, due for release on 18 September.

AUD/USD Daily Chart

AUD/USD Short-Term Technical Outlook

Further increases are expected to 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 level of 0, 7000.

Sellers, on the other hand, can initially pull the pair to the September low of 0.6622 (September 11), which is supported by the key 200-day SMA at 0.6620, all ahead of the 2024 low of 0 ,6347 (August 5).

The four-hour chart shows further strengthening of the bullish position. That said, 0.6789 appears as the first upside barrier, followed by 0.6823. On the downside, the preliminary 100-SMA is at 0.6732, followed by the 55-SMA at 0.6705 and then 0.6692. The RSI hovered around 60.