AUD/USD update
AUD/USD faces pressure as weaker Australian inflation and mixed Federal Reserve signals prompt traders to anticipate central bank decisions.
Written by
Market Analyst
AUD/USD finished lower last week at 0.6468, declining 1.48%, marking its largest weekly fall since late March.
Its decline accelerated after Wednesday's Australian second-quarter (Q2) consumer price index (CPI) report came in cooler than expected. The Reserve Bank of Australia's (RBA) preferred inflation measure, the trimmed mean, rose by 0.6% quarter-on-quarter (QoQ), allowing the annual rate to fall to 2.7% from 2.9%.
This brought inflation closer to the midpoint of the RBA’s 2–3% target range and followed a weak jobs report for June and tepid first-quarter (Q1) growth data – a trifecta widely expected to lead the RBA to cut interest rates by 25 basis points (bp) to 3.60% next week.
The downward move in AUD/USD gained further traction on Thursday following a hawkish Federal Open Market Committee (FOMC), which drove it to a low of 0.6418, before rebounding on Friday after the disappointing United States (US) jobs report. The report pushed the markets to price in a 95% probability of a Federal Reserve (Fed) rate cut in September, up from 50% the prior day.
Looking ahead, this week’s data calendar is relatively light in both Australia and the US, with little to guide the market away from the prevailing expectation that the RBA will cut rates by 25 bp at its 12 August meeting, and that the Fed will do the same at its September meeting.
In the absence of new catalysts, we expect AUD/USD to be primarily influenced by factors that are mostly US dollar-negative:
AUD/USD has spent three and a half months trading sideways to higher within an upward-sloping flag pattern, consolidating and extending its rebound from the April 0.5912 low. Notably, the consolidation in recent weeks has largely occurred above the 200-day moving average, currently at 0.6392.
As noted in our recent AUD/USD articles, an upward-sloping flag pattern in an uptrend is generally considered a bullish continuation pattern. While this interpretation holds, some prefer seeing a downward-sloping flag following an uptrend.
Putting aside this debate – while AUD/USD remains within the confines of the upward-sloping flag, currently at 0.6425 - 0.6415ish on the downside and 0.6630 - 0.6640 on the upside, it is likely to see a continuation of the ‘two steps forward, one step back’ pattern of trading observed over the past three and a half months.
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