Australian Dollar advances amid risk-on mood, light trading

• The Australian Dollar gained ground due to risk-on after softer UoM 5-year Inflation Expectation on Friday.
• Australian equities rose above 7,770, following gains on Wall Street from Friday.
• The US Dollar weakened after the UoM 5-year Consumer Inflation Expectations (May) eased to 3.0% compared to the estimated 3.1%.

The Australian Dollar (AUD) extends its gains against the US Dollar (USD) for the second consecutive session on Monday as overall market risk appetite improved, despite diminishing expectations for Federal Reserve interest rate cuts. Meanwhile, investors eagerly anticipate the Monthly Australian Consumer Price Index report on Wednesday, seeking insights into the trajectory of domestic monetary policy.

The Australian Dollar may gain ground as the latest Reserve Bank of Australia (RBA) meeting minutes suggested that the board found it difficult to predict future changes in the cash rate, acknowledging that recent data increases the likelihood of inflation persisting above the 2-3% target for a prolonged duration.

The US Dollar (USD) weakened following the release of the University of Michigan's 5-year Consumer Inflation Expectations for May on Friday. It eased slightly to 3.0%, below the forecasted 3.1%. Despite the upward revision of the Consumer Sentiment Index to 69.1 from a preliminary reading of 67.4, it still marked the lowest level in six months. These figures likely contributed to strengthening investors’ sentiment regarding potential rate cuts by the Federal Reserve.

According to the CME FedWatch Tool, the probability of the Federal Reserve implementing a 25 basis-point rate cut in September has decreased to 44.9% from 49.0% a week earlier. It is worth noting that the US market will be closed due to the Memorial Day bank holiday on Monday.

Daily Digest Market Movers: Australian Dollar advances due to improved risk sentiment

• The ASX 200 Index rose above 7,770 on Monday, with nearly all sectors recovering losses from the previous week. Australian shares also followed gains on Wall Street from Friday amid improved risk appetite.
• The US Census Bureau released Durable Goods Orders on Friday, showing a solid recovery in April with a 0.7% month-over-month increase, compared to the forecasted 0.8% decline. However, March’s figure was revised down to 0.8% from the initial estimate of 2.6%.
• On Thursday, Australian Consumer Inflation Expectation of future inflation over the next 12 months fell to 4.1% in May from 4.6% in April, marking the lowest level since October 2021.
• The S&P Global US Composite PMI surged to 54.4 in May, marking the highest level since April 2022. The Service PMI rose to 54.8, indicating the biggest output growth in a year, while the Manufacturing PMI increased to 50.9.
• Reuters cited Chinese state media reports on Thursday, which indicated that China has deployed numerous fighter jets and conducted simulated strikes in the Taiwan Strait and around groups of Taiwan-controlled islands. Any geopolitical tension in the region may impact the Australian market as China and Australia are both close trade partners.

Technical Analysis: Australian Dollar tests nine-day EMA, followed by the key level of 0.6650

The Australian Dollar trades around 0.6630 on Monday. The 14-day Relative Strength Index (RSI) is positioned slightly above the 50 level, showing a bullish bias. Analysis of the daily chart shows that the AUD/USD pair is testing the lower boundary of a rising wedge. A return into the wedge would suggest the strengthening of the bullish bias.

The nine-day Exponential Moving Average (EMA) at 0.6634 and the lower boundary of the rising wedge serve as immediate resistance. A breakthrough above this level could lead the AUD/USD pair to test the four-month high of 0.6714, followed by the upper limit of the ascending triangle around 0.6730.

On the downside, the psychological level of 0.6600 could act as the key support, followed by the major level of 0.6550. A further decline may exert downward pressure on the AUD/USD pair, potentially driving it toward the throwback support region at 0.6470.

AUD/USD: Daily Chart