On Monday, the AUD/USD pair tested the support level at 0.6720. At this price point, the middle line of the Bollinger Bands indicator coincides with the upper band of the Kumo cloud on the daily chart. Although sellers failed to break through this price barrier, the general sentiment remains bearish. The aussie has been getting weaker for the second consecutive week, eben after a strong labor market report from Australia. Buyers tried to build on the momentum (the pair surged to the 0.6850 level), but eventually faced a setback – on the same day, sellers took the initiative and pulled the price back to the 0.67 level. The Australian dollar couldn't sustain its gains and ignore the US dollar's broad strength. As a result, the pair lost nearly 200 pips over the week.
However, despite the downtrend, prospects for the pair remain uncertain. Its fate depends on two events that will occur over the next few days.
Firstly, it's the July meeting of the Federal Reserve (on July 25 and 26). According to the CME FedWatch tool, there is almost a 100% (99.8%) chance the new fed funds range after Wednesday's release will be 5.25% to 5.50%. However, the probability of a rate hike in September is only 16%, and in November, it's 30%. Given this disposition, it can be assumed that the market will ignore the rate hike in July. The US dollar will benefit from the July meeting only if it increases the likelihood of further tightening at the next meeting, which would be in September.
The chances of this scenario have diminished after a series of inflation reports released in the US (Consumer Price Index, Producer Price Index, and Import Price Index), all of which showed negative results. Nevertheless, the intrigue remains, as some Fed officials (such as Waller and Daly) have called for maintaining a hawkish stance, stating that it's "too early to celebrate victory over inflation." If this statement becomes the leitmotif of the July meeting, the greenback will strengthen its positions across the market, and AUD/USD sellers may push the pair back towards the 65-66 levels. However, if the Fed uses cautious wording in its accompanying statement, and Fed Chair Jerome Powell's stance at the press conference has a "concluding" character, AUD/USD buyers may seize the initiative (in which case, the main target would be the 0.6900 level – the upper Bollinger Bands line on the daily chart).
The Australian dollar is also waiting for key events. On Wednesday, July 26, key inflation reports will be released in Australia. If the indicators come in the "green," the likelihood of a 25-basis-point rate hike by the Reserve Bank of Australia at the August meeting will significantly increase.
According to preliminary forecasts, the Consumer Price Index in June is expected to rise by 5.5% m/m. This would indicate that inflationary pressures have slowed down since the index was at 5.6% in May, following a rise to 6.3% in the previous month. For the second quarter, the CPI should reach 6.2% y/y after an increase of 7.0% y/y in the first quarter. In quarterly terms, the index should also reflect a slowdown in inflation to 1.0% q/q, after rising by 1.4% in the previous reporting period.
If the inflation reports come out at least at the forecasted level (let alone in the "red"), the aussie will come under pressure as the RBA is likely to maintain a wait-and-see position in such a case. But if the release surprises the market with a "green," then there may be different options. At least, the intrigue regarding the possible outcomes of the July RBA meeting will increase.
I'll remind you that the minutes of the June RBA meeting had a quite hawkish tone: according to the document, Council members agreed that "some further tightening" of monetary policy may be required, and this issue will be considered at the August meeting. Therefore, the inflation report could very well tilt the balance in favor of the hawkish scenario, which implies another 25-basis-point rate hike.
However, currently, the situation remains in a state of uncertainty. The AUD/USD pair is under pressure not only due to the US dollar's broad strength (on Monday, the US Dollar Index reached an almost two-week high, testing the 101 level) but also due to worrisome news from China. China's economic growth rates turned out to be weaker than analysts' expectations, despite actual acceleration. China's GDP in the second quarter of this year grew by 6.3% in year-on-year terms, while the consensus forecast was for a growth of 7.3%. This is even considering that in April-May of the previous year, strict quarantine restrictions were in effect in several major cities in China. But even with the low base, the result of the second quarter of 2023 was one percentage point below the forecast. The urban unemployment rate in China in June was 5.2%, but according to Bloomberg, youth unemployment reached a record high of 21%. As China is one of Australia's major trading partners, such results weakened the Aussie's position.
Thus, the AUD/USD pair is in an ambiguous situation. On one hand, the pair is under pressure due to the greenback's gains and weak growth in the Chinese economy. On the other hand, it's premature to talk about the prospects of a sustainable downtrend at the moment, as traders face important "tests" ahead (the Fed meeting, the inflation growth report in Australia). Therefore, be cautious with short positions. If sellers break the support level of 0.6720 (the middle Bollinger Bands line, coinciding with the upper Kumo cloud boundary on 1D), the next bearish target would be at 0.6650 (the lower boundary of that cloud). If bears fail to accomplish this task, a corrective pullback is possible - at least to the 0.6790 level (the Tenkan-sen line on the same timeframe).
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