The Australian Dollar (AUD) experienced an upward trend for the second consecutive day on Wednesday. This rise is largely attributed to the Judo Bank’s Australia Purchasing Managers Index (PMI) figures, which demonstrated a slight improvement in June. In addition to the positive PMI data, Australia’s Retail Sales, a critical indicator of consumer spending, rose by 0.6% month-on-month in May, a significant increase from the previous month’s modest 0.1% growth. This result surpassed market expectations, which had anticipated a 0.2% rise. The robust retail sales data suggests increased consumer confidence and spending, contributing to the AUD’s strength.
However, the appreciation of the AUD/USD pair might face limitations as the US Dollar (USD) breaks its four-day losing streak, buoyed by a recovery in the yield on the 2-year Treasury bond, which currently stands at 4.75%. Traders are eagerly awaiting further direction from the upcoming US economic reports, including the ADP Employment Change, ISM Services PMI for June, and the FOMC Minutes, all scheduled for release later on Wednesday.
Economic Indicators and Market Sentiment
The Australian Dollar’s recent performance can be attributed to a combination of domestic economic data and international market movements. Judo Bank’s Australia Services PMI rose to 51.2 month-on-month, up from the previous month’s 51.0, exceeding the forecasted decline to 50.6. Similarly, the Composite PMI increased to 50.7 month-on-month, compared to 50.6 in the previous period. These figures indicate a modest expansion in the services sector, reflecting resilience in the Australian economy.
Conversely, China’s Services PMI, reported by Caixin, fell from 54.0 in May to 51.2 in June, falling short of market expectations of 53.4. Given Australia’s close trade relationship with China, fluctuations in China’s economic performance can significantly impact the AUD. The recent downturn in China’s PMI adds a layer of complexity to the AUD’s outlook. In the United States, Federal Reserve (Fed) Chair Jerome Powell’s recent comments have introduced a slightly dovish tone to the market. Powell stated that the Fed is moving back on the disinflationary path but emphasized the need for further evidence before considering interest rate cuts, given the continued strength of the US economy and labor market.
Domestic Economic Factors
The Reserve Bank of Australia’s (RBA) June monetary policy meeting minutes, released on Tuesday, revealed a cautious approach towards interest rate adjustments. The board deemed the case for holding rates steady stronger than the case for an increase, highlighting the need to monitor inflationary risks closely. Data suggested an upside risk for May’s Consumer Price Index (CPI), underscoring the board’s vigilance regarding inflation.
Additionally, the RBA’s Index of Commodity Prices decreased by 4.1% year-on-year in June, following a revised 6.0% decline in the previous month. This marks the mildest deflation in sixteen consecutive months, indicating some stability in commodity prices, a significant factor for the Australian economy. The Melbourne Institute’s Monthly Inflation Gauge heightened concerns about potential interest rate hikes by the RBA in August. The gauge increased by 0.3% in June, maintaining the same pace as in May, marking the fourth consecutive month of rises and reaching the highest level since January. In China, the chief economist at CITIC Securities suggested potential measures by the People’s Bank of China (PBOC) to inject liquidity into the market, such as reducing the reserve requirement ratio (RRR). Any significant economic shifts in China could have substantial implications for the AUD, given the trade interdependencies between the two nations.
Technical Analysis
On the technical front, the Australian Dollar is trading around 0.6670. The daily chart analysis reveals a symmetrical triangle pattern, indicating a pause in the trend as traders find equilibrium. A decisive breakout from this triangle would signal a clear directional trend. The 14-day Relative Strength Index (RSI) is slightly above the 50 level, suggesting a bullish bias. The AUD/USD pair is poised to test the upper boundary of the symmetrical triangle around 0.6680, followed by the psychological level of 0.6700. Additional resistance is identified at 0.6714, the highest level since January.
On the downside, key support is located around the lower boundary of the symmetrical triangle at 0.6630, followed by the 50-day Exponential Moving Average (EMA) at 0.6625. This technical setup provides a balanced view of potential upward and downward movements, contingent on forthcoming economic data and market reactions. The Australian Dollar’s recent appreciation is driven by a mix of positive domestic economic indicators and broader market dynamics. While the immediate outlook appears cautiously optimistic, the interplay of domestic and international factors will continue to shape the AUD’s trajectory. Market participants remain attentive to upcoming economic data releases and central bank communications, which will provide further direction for the currency.
