AUD/USD fluctuations set to continue

The AUD/USD finished last week lower at 0.6660 (-1.55%), continuing its decline from an eight-month high of 0.6824. The drop was driven by safe-haven flows into the US dollar after weaker US labour market data raised concerns about a potential economic slowdown.

Despite hawkish commentary from the Reserve Bank of Australia (RBA), the AUD/USD continued to fall. The June quarter’s National Accounts revealed the Australian economy grew at its slowest annual pace since the early 1990s recession, further pressuring the currency.

Support from Chinese inflation data

As the new week begins, the AUD/USD has found some support, briefly trading up to 0.6689. This uptick followed news that China’s annual consumer inflation rose for the seventh consecutive month in August, increasing by 0.6% year-over-year.

Although the rise was below the expected 0.8% and was driven by higher food costs due to bad weather, it marked an improvement from July’s 0.5% increase. This raises optimism that China’s economy may have escaped the deflationary pressures that plagued it late last year.

This week is relatively quiet on the Australian data front, with only Westpac Consumer Confidence and NAB Business Confidence reports scheduled. As a result, risk sentiment and US equity market performance will likely be the key drivers for AUD/USD.

Westpac consumer confidence

Date: Tuesday, 10 September at 10.30am AEST

In August, the Westpac-Melbourne Institute Consumer Sentiment index jumped by 2.8% to a six-month high of 85.0. This rebound far exceeded market expectations of a modest 0.5% rise, following a 1.1% dip in July.

The increase was attributed to the positive impact of tax cuts and fiscal measures, as well as easing concerns over RBA rate hikes. The 'family finances vs a year ago' sub-index surged by 11.7% to a two-year high of 70.9, while the outlook for family finances over the next 12 months rose by 5.1% to 96.8.

Are rate cuts approaching?

The preliminary expectation for September is for a slight decline to 83. The interest rate market currently shows an 85% probability of a 25 basis points (bp) rate cut in December, with a cumulative 58 bp of cuts expected by April 2025.

Westpac-Melbourne Institute consumer sentiment index chart

AUD/USD technical analysis

The AUD/USD remains within a messy multi-month range after testing and rebounding from a support level near 0.6350 in early August and then rejecting resistance above 0.6800 in late August.

AUD/USD weekly chart

The AUD/USD starts the new week within eyesight of the support coming from the 200-day moving average at 0.6616, a possibility we flagged last Monday after the AUD/USD’s initial rejection from the 0.6800/25 resistance level.

If the AUD/USD were to see a sustained break of the 200-day moving average at 0.6616, it would signal that the rotation lower is set to extend towards a layer of support at 0.6505/0.6480.

Conversely, if the AUD/USD can hold above the 200-day moving average and then reclaim resistance at 0.6700/20, it would indicate a retest of resistance at 0.6800/25.