The Australian Dollar (AUD) faced a challenging day on Monday as traders grappled with the aftermath of disappointing economic indicators and shifting market sentiment. Despite efforts to recover, the AUD/USD currency pair struggled, largely influenced by ongoing narratives concerning China’s economy and commodity prices.
Recent economic data has put the dollar under significant pressure. The US Labor Department revealed that employers added 172,000 jobs in the last report, surpassing analyst expectations of around 85,000. This, coupled with upward revisions totaling approximately 93,000 jobs for prior months and an unchanged unemployment rate of 4.3%, led to a strengthening of the US Dollar, which surged to a two-month high. In contrast, the Aussie fell to its lowest level since mid-April, trading around 0.7050 as Asian markets opened.
Attempts to gain ground on Monday stalled, suggesting that the rally was more about short-covering rather than a firm conviction to buy the Australian Dollar. While the prevailing narrative suggested that stable iron ore prices and a recovering Chinese economy would support the Aussie, the reality appears different. Recent data highlights that Chinese steel production in April was at its lowest for the month since 2018, with a nearly 3% year-on-year decline, indicating structural issues in China’s property sector and prompting mills to depend on existing inventories rather than fresh imports.
Upcoming Chinese trade data, particularly focusing on May exports and imports, is expected to reveal whether this trend of diminishing demand is accelerating. Additionally, consumer price index (CPI) figures are expected on Wednesday, with the market keeping a close watch on indicators of inflation and overall demand. However, even if CPI indicates a revival, it may not provide the support the AUD needs. The anticipated rise in producer prices, driven by increased commodity and energy costs, suggests a cost-push inflation scenario rather than an overall demand increase, which would be more beneficial for the Australian economy.
The focus is increasingly turning toward American economic data, with the US CPI report expected to show a year-on-year increase of around 4.2%, largely attributed to a surge in energy prices influenced by geopolitical tensions. This could significantly impact Federal Reserve policy, with expectations of an interest rate hike by December rising to nearly 72%. High-beta currencies, such as the AUD, are particularly vulnerable in this context, presenting additional risk.
In global markets, crude oil prices saw volatility, initially spiking by more than 5% amidst tensions between Iran and Israel, before settling down as the situation saw a temporary pause. Elevated energy prices can benefit the US Dollar via inflation channels while putting further strain on the Australian Dollar.
Technically, the AUD/USD pairing is displaying signs of potential upward movement, with daily Stochastic Relative Strength Index (Stoch RSI) recovering from oversold territory. However, significant resistance levels remain around 0.7100 to 0.7150, with critical support found near the 0.7000 mark. A decisive break below this point could see the currency slide further toward 0.6950.
In summary, the Australian Dollar’s outlook appears bearish in the short term, leaning towards selling rallies as the market awaits confirmation from upcoming economic data, particularly the US CPI report. Current trends suggest that the foundational supports for the AUD, mainly tied to Chinese economic health and commodity prices, may not hold up under the pressures from central bank strategies and changing global dynamics.
