The Australian Dollar (AUD) has found some support amid decreasing expectations for a rate cut by the Reserve Bank of Australia (RBA). Following a recent decline in China’s Consumer Price Index (CPI), where inflation fell by 0.4% year-on-year in August from 0% in July, market sentiment has reacted with some caution. These developments are significant given the close trade relationship between Australia and China, suggesting that fluctuations in the Chinese economy could heavily influence the AUD.
Despite the recovery of the AUD against earlier daily losses, the AUD/USD currency pair has struggled to maintain strength. This is largely attributed to the resilience of the US Dollar (USD), which remains stable even in light of the recent US Nonfarm Payrolls Benchmark Revision. This revision indicates that total Nonfarm employment for March 2025 may be adjusted downward by 911,000 jobs, signaling a potentially weaker labor market than previously anticipated.
On the domestic front, the Australian dollar may limit its downside potential due to a robust trade surplus in July and encouraging GDP growth figures for Q2, paired with unexpectedly high inflation rates for July. Analysts now place an 84% probability on the RBA maintaining its policy status quo in September, while the possibility of a 25-basis-point rate cut in November has decreased from 100% to 80%. However, experts like Matthew Hassan of Australian Macro-Forecasting caution that consumer recovery appears sluggish. A decline in Westpac Consumer Confidence highlights growing concerns, as it fell to 95.4 in September from 98.5 in August.
As attention turns toward upcoming US inflation reports this week, investors will be closely monitoring how these figures could influence the Federal Reserve’s monetary policy. The August Producer Price Index (PPI) is set to be released on Wednesday, followed by the Consumer Price Index (CPI) on Thursday, both of which will serve as critical indicators of inflation trends.
Currently, the US Dollar Index (DXY), which tracks the USD against a basket of six major currencies, is holding steady around 97.70. Nevertheless, there is a prevailing expectation among traders for the Fed to cut rates in September, potentially marking the beginning of a new easing cycle. The CME FedWatch tool indicates a 93% chance of a 25-basis-point rate cut being priced in for the upcoming policy meeting, up from 86% just a week ago.
In employment metrics, the US Bureau of Labor Statistics has reported that the Nonfarm Payrolls rose by only 22,000 jobs in August, significantly lower than the forecasted 75,000. This follows a revised increase of 79,000 jobs in July. Additionally, the unemployment rate has climbed to 4.3%, consistent with expectations.
In terms of trade, China’s Trade Balance has seen an uptick, rising to CNY 732.7 billion in August, with exports increasing by 4.8% year-over-year, albeit slowing from 8% in July. Australia’s monthly Trade Balance also rose in July to AUD 7,310 million, exceeding expectations, and GDP growth for Q2 increased by 0.6% quarter-over-quarter.
Technical analysis shows that the AUD/USD pair is currently trading around 0.6580 and is hovering near crucial resistance levels. Breaks above the 10-month high of 0.6625 could strengthen bullish sentiment, pushing the pair toward an 11-month high of 0.6687. Conversely, a drop below the ascending channel’s lower boundary could lead to downward pressure, with possible tests around 0.6550 or even lower at the 50-day EMA at 0.6512.
In summary, while the Australian Dollar shows some resilience amid changing monetary policy expectations, key economic indicators from both Australia and the US will continue to drive market sentiment in the coming days.
