The Australian Dollar (AUD) continues its decline for the second consecutive session on Tuesday, with the AUD/USD pair losing ground due to a modest rebound in the US Dollar (USD). This rebound is attributed to increased risk aversion following the attempted assassination of former US President Donald Trump on Saturday. Investors are now eyeing the US Retail Sales data for June, set to be released later in the North American session, for further insights into the US economic situation.
Economic and Political Developments Impacting AUD
The third plenum of the Chinese Communist Party’s 20th National Congress, held from July 15 to 18, has added to the economic uncertainties. Standard Chartered anticipates cuts from the People’s Bank of China (PBOC) in both rates and the reserve requirement ratio (RRR) due to a slowdown in GDP growth in Q2. China’s growth drivers remain uneven, and trade tensions are escalating, with the US and EU imposing new tariffs on Chinese electric vehicles (EVs).
RBA and US Fed Policy Outlooks
Despite these challenges, the AUD/USD pair remains close to its strongest levels as speculation grows that the Reserve Bank of Australia (RBA) might delay joining the global rate-cutting cycle or even raise interest rates again. Persistently high inflation in Australia has prompted the RBA to maintain a hawkish stance. In contrast, cooling US inflation has strengthened bets for a Federal Reserve rate cut in September.
The USD’s potential upside is limited by increasing speculation that the US Fed will lower borrowing costs. According to CME Group’s FedWatch Tool, markets now indicate an 85.7% probability of a 25-basis point rate cut at the September Fed meeting, up from 71.0% a week earlier.
Market and Economic Indicators
Fed Chair Jerome Powell noted on Monday that the three US inflation readings this year “add somewhat to confidence” that inflation is on course to meet the Fed’s target in a sustainable manner, suggesting that a shift to interest rate cuts may not be far off. Fed Bank of San Francisco President Mary Daly also mentioned that inflation is cooling in a way that bolsters confidence it’s on its way to 2%, but more information is needed before making a rate decision.
In China, a key trade partner of Australia, GDP grew by 4.7% year-over-year in the second quarter, compared to a 5.3% expansion in the first quarter and an expected 5.1%. The National Bureau of Statistics (NBS) reported that China’s economy operated generally steadily in the first half of the year, with H1 GDP growth at +5.0% year-on-year. However, the NBS highlighted increasing external uncertainties and numerous domestic challenges that China’s economy faces in the second half of the year.
US President Joe Biden on Monday addressed the nation, condemning all political violence and calling for unity. Biden emphasized the need to “cool it down,” noting the weekend attack on Trump and the potential for election-year violence on multiple fronts.
China’s Retail Sales (YoY) increased by 2.0% in June, falling short of the expected 3.3% and below May’s 3.7%. Meanwhile, the country’s Industrial Production for the same period grew by 5.3% year-over-year, surpassing estimates of 5.0%, albeit slightly lower than May’s 5.6%.
On Thursday, US data showed that the Core Consumer Price Index (CPI), excluding volatile food and energy prices, rose by 3.3% year-over-year in June, compared to May’s increase of 3.4% and expectations of the same. The core CPI increased by 0.1% month-over-month, against the expected and prior reading of 0.2%.
Technical Analysis: AUD/USD Pair
The Australian Dollar trades around 0.6750 on Tuesday. The analysis of the daily chart shows that the AUD/USD pair consolidates within an ascending channel, indicating a bullish bias. However, the 14-day Relative Strength Index (RSI) declines toward the 50 level, suggesting a potential correction. A further decline could weaken the bullish trend.
The AUD/USD pair may test the psychological level of 0.6800. A breakthrough above this level could support the pair to approach the upper boundary of the ascending channel near 0.6810.
On the downside, immediate support appears around the nine-day Exponential Moving Average (EMA) at 0.6743. Further support is seen near the lower boundary of the ascending channel at 0.6695. A break below this level could push the AUD/USD pair toward the throwback support at 0.6590.
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