AUD/USD Climbs Higher Ahead of US Retail Sales Data
AUD/USD Gains Momentum
The AUD/USD pair has continued to attract buyers for the second consecutive day, pushing higher and reaching a nearly two-week high during early European trading on Tuesday. This marks the fourth day in a row of gains, with spot prices now trading above the mid-0.6700s, up around 0.15% for the day. As traders await the Federal Open Market Committee (FOMC) meeting on Wednesday, the pair seems poised for further upward momentum, fueled by a combination of factors, including market sentiment and economic expectations.
USD Weakness Amid Fed Rate Cut Expectations
One of the key drivers behind the recent rally in the AUD/USD pair is the US Dollar’s continued decline. The greenback is consolidating its recent heavy losses, which have dragged it down to its lowest levels since July 2023. This weakness stems from growing market bets on an oversized 50 basis point rate cut by the Federal Reserve (Fed). Expectations for a sharp rate cut have dampened the USD’s appeal, with investors positioning themselves for a potential policy shift.
In contrast, the Reserve Bank of Australia (RBA) maintains a more hawkish outlook, supporting the Australian Dollar (AUD). A generally positive tone in global equity markets has also contributed to the risk-sensitive Aussie’s gains. This combination of a weakening USD and a resilient AUD has been a major factor propelling the AUD/USD pair higher.
Technical Outlook: AUD/USD Breaks Key Levels
Technically, the AUD/USD pair has now rallied nearly 150 pips from the vicinity of its key 200-day Simple Moving Average (SMA) support around the 0.6620 region. Last week, the pair touched a four-week low near this level, but it has since rebounded sharply. The 200-day SMA is often seen as a critical support level, and the recent price action suggests that buyers are defending this level, adding to the bullish sentiment.
This latest surge in the AUD/USD pair aligns with a broader fundamental backdrop that appears tilted toward USD bears. With the Fed’s potential rate cut and the positive risk tone, the path of least resistance for the AUD/USD pair appears to be upward. However, certain external factors, such as China’s economic challenges, could temper the optimism.
China’s Economic Slowdown: A Potential Headwind
Despite the favorable conditions for the AUD/USD pair, concerns about a slowdown in China loom over the market. The Australian Dollar is often considered a proxy for China’s economic performance due to the close trade relationship between the two countries. Weakness in China’s economy can therefore negatively impact the AUD.
Over the weekend, a series of downbeat economic reports from China highlighted ongoing challenges. These reports suggest that China may struggle to achieve its official 2024 GDP growth target of around 5%. Economic weakness in China, Australia’s largest trading partner, could weigh on the AUD and act as a headwind to further gains in the AUD/USD pair.
US Retail Sales Data and Market Sentiment
Looking ahead, traders are closely watching the upcoming US Retail Sales report, which could provide further insights into the health of the US economy. This data, along with US bond yields and broader market sentiment, will likely influence USD demand and impact the AUD/USD pair’s price action.
However, given the market’s focus on the FOMC meeting and the potential for a significant rate cut, the reaction to the US macroeconomic data may be muted. The retail sales figures, while important, are likely to take a back seat to the Fed’s policy decision on Wednesday.
Caution Ahead of the FOMC Meeting
While the current environment supports further gains in the AUD/USD pair, traders remain cautious ahead of the Fed’s rate decision. The FOMC meeting represents a significant event risk, and the outcome could shape the direction of the currency pair in the near term.
With the market pricing in a 50 basis point rate cut, any deviation from this expectation could trigger volatility in the USD. If the Fed signals a more aggressive approach to rate cuts or adopts a dovish tone, it could further weaken the USD and support the AUD/USD pair. On the other hand, a more conservative stance could lead to a reversal of the recent AUD gains.
Conclusion: AUD/USD Poised for Further Gains but Faces Risks
In summary, the AUD/USD pair is benefiting from a combination of factors, including Fed rate cut expectations, a positive risk tone, and the RBA’s hawkish stance. Technical indicators also support further upside, as the pair has bounced from a key support level. However, risks remain, particularly concerning China’s economic performance and the upcoming FOMC meeting.
Traders should keep a close eye on US Retail Sales data and the broader market sentiment, but the primary focus will be on the Fed’s policy decision. The outcome of this meeting will likely provide the next major directional impetus for the AUD/USD pair, with the potential for both further gains or a pullback depending on the Fed’s actions.
While the path of least resistance currently appears to be to the upside, caution is warranted as the market navigates these key events.
