Australian Dollar attracts buyers due to odds of RBA maintaining hawkish stance

• The Australian Dollar could appreciate due to expectations of the RBA’s maintaining higher rates.
• The upside of the AUD could be limited as softer Q2 inflation diminished the odds of another RBA rate hike.
• CME FedWatch tool suggests 72.0% odds of a 50-basis point Fed rate cut in September, up from 11.8% last week.

The Australian Dollar (AUD) moves sideways against the US Dollar (USD) with a positive bias on Thursday. This AUD/USD pair may appreciate due to the Reserve Bank of Australia's (RBA) hawkish hold of the cash rate at 4.35% on Tuesday. Furthermore, RBA Governor Michele Bullock has indicated that inflation is still too high, and a rate cut is not anticipated in the near future.

However, Australia’s recent inflation figures for the second quarter have reduced the expectations for another RBA rate hike, which could put a cap on the upside of the Australian Dollar. Markets are now projecting an RBA rate cut in November, a shift from the earlier forecast for April of next year.

The US Federal Reserve (Fed) is widely anticipated to implement a more aggressive rate cut beginning in September, following weaker employment data from July that has heightened concerns about a potential US recession.

According to the CME FedWatch tool, there is now a 72.0% probability of a 50-basis point (bps) interest rate cut by the US Federal Reserve (Fed) in September, up from 11.8% a week earlier. The expectation of deeper rate cuts may put pressure on the US Dollar in the near term.

Daily Digest Market Movers: Australian Dollar consolidates with a positive bias

• The Australian Dollar might encounter difficulties due to increased risk aversion linked to escalating tensions in the Middle East. According to two US intelligence officials, Iran and its allies are preparing potential retaliation against Israel. This response is expected following the recent killings of a top military commander of Iran’s Hezbollah in Lebanon and a senior Hamas leader in Tehran, as reported by CNN.
• China's Trade Balance showed a surplus of 84.65 billion for July, falling short of the 99.0 billion expected and 99.05 billion previously. Exports (YoY) came in at 7.0% vs. 9.7% expected and 8.6% previously. Meanwhile, Imports increased 7.2% YoY against 3.5% expected, swinging from a decline of 2.3% prior. Any change in the Chinese economy could impact the Australian market as both countries are close trade partners.
• The AiG Australian Industry Index showed a slight easing in contraction in July, improving to -20.7 from the previous -25.6 reading. Despite this improvement, the index has indicated contraction for the past twenty-seven months.
• On Wednesday, Treasurer Jim Chalmers contested the RBA's view that the economy remains too robust and that large government budgets are contributing to prolonged inflation, according to Macrobusiness.
• On Tuesday, RBA Governor Michele Bullock mentioned that the board had seriously considered increasing the cash rate from 4.35% to 4.6% due to ongoing concerns about excess demand in the economy. Additionally, RBA Chief Economist Sarah Hunter noted on Wednesday that the Australian economy is performing somewhat stronger than previously anticipated by the RBA.
• According to Reuters, Federal Reserve Bank of San Francisco President Mary Daly expressed increased 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 that there is openness to the possibility of cutting rates in upcoming meetings.”
• Chicago Fed President Austan Goolsbee stated on Monday that the US central bank is prepared to act if economic or financial conditions worsen. Goolsbee emphasized, "We're forward-looking about it, and so if the conditions collectively start coming in like that on the through line, there’s deterioration on any of those parts, we’re going to fix it.” according to Reuters.

Technical Analysis: Australian Dollar hovers around 0.6550

The Australian Dollar trades around 0.6530 on Thursday. The daily chart analysis shows that the AUD/USD pair is consolidating above the descending channel, signaling a weakening of a bearish bias. Furthermore, the 14-day Relative Strength Index (RSI) is rising from the oversold 30 level, indicating a potential for further upward movement.

In terms of support, the AUD/USD pair may find support at the upper boundary of the descending channel around the throwback support of 0.6470 level. A break below the latter could exert downward pressure on the pair to test the lower boundary of the descending channel around the level of 0.6420

On the upside, the nine-day Exponential Moving Average (EMA) at 0.6535 serves as immediate resistance, with additional resistance at the 0.6575 level, where "throwback support" has turned into resistance. A breakout above this level could push the AUD/USD pair toward a six-month high of 0.6798.

AUD/USD: Daily Chart