The Australian Dollar (AUD) maintained its strength following the Reserve Bank of Australia‘s (RBA) decision to keep the Official Cash Rate (OCR) steady at 4.35% for the sixth consecutive time on Tuesday. In a subsequent press conference, RBA Governor Michele Bullock emphasized the importance of staying vigilant against inflation. Bullock acknowledged the ongoing risk that inflation may not return to target promptly, necessitating higher interest rates for an extended period. She clearly stated that a near-term reduction in the cash rate does not align with the RBA’s current strategy.
Despite these challenges, the AUD faced pressure against the US Dollar (USD) due to rapid policy adjustments by central banks and growing concerns about a potential hard landing for the US economy. Additionally, second-quarter inflation data has tempered expectations for another RBA rate hike, with markets now anticipating an RBA rate cut in November, earlier than the previously forecasted April next year.
Conversely, the US Dollar has weakened amid increasing expectations of a 50-basis point (bps) interest rate cut by the US Federal Reserve (Fed) in September. The CME FedWatch tool shows a 74.5% probability of this significant cut, a notable rise from the 11.4% chance reported a week earlier.
Market Movements: Australian Dollar Advances Pre-RBA Decision
Federal Reserve Bank of San Francisco President Mary Daly expressed confidence on Monday that US inflation is moving towards the Fed’s 2% target. Daly noted that risks to the Fed’s mandates are becoming more balanced and suggested an openness to rate cuts in upcoming meetings.
Similarly, Chicago Fed President Austan Goolsbee indicated the US central bank‘s readiness to act if economic or financial conditions deteriorate, emphasizing a proactive approach to potential economic challenges.
In economic data, the US ISM Services PMI rose to 51.4 in July from 48.8, surpassing market expectations. Conversely, the Judo Bank Australia Composite PMI fell to 49.9 in July from 50.2 in June, dropping below the neutral 50 mark for the first time since January. The Services PMI also decreased, marking the slowest growth in this sequence of expansion.
The US Nonfarm Payrolls (NFP) increased by 114K in July, below the expected 175K, with revised figures from the previous month showing a decrease. US Average Hourly Earnings also eased to 0.2% month-over-month, below market consensus, and annual earnings growth slowed to 3.6%.
In China, the Caixin Services PMI rose to 52.1 in July, beating expectations. However, the Caixin Manufacturing PMI posted a lower-than-expected reading, highlighting volatility in the Chinese economy, which can significantly impact the Australian market due to close trade ties.
Technical Analysis: Australian Dollar Moves Above 0.6500
The Australian Dollar traded around 0.6520 on Tuesday. Technical analysis shows the AUD/USD pair breaching above a descending channel, weakening the bearish bias. The 14-day Relative Strength Index (RSI) has risen slightly from the oversold 30 level, indicating potential for further upward correction.
The AUD/USD pair could find immediate support around 0.6470, followed by the lower boundary of the descending channel at 0.6450. On the upside, resistance is first encountered at the nine-day Exponential Moving Average (EMA) at 0.6540, followed by resistance at 0.6575. A breakout above this level could propel the AUD/USD pair toward a six-month high of 0.6798.
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