• AUD/USD is supported by a combination of factors but lacks bullish conviction.
• The RBA’s restrictive stance continues to act as a tailwind given the subdued USD exchange rate development.
• However, traders are waiting for the important US inflation numbers before placing new bets.

The AUD/USD pair continues to struggle to reach a technically significant 200-day SMA (Simple Moving Average) and is trading with a slightly positive bias around the 0.6600 level during the early European session on Tuesday. Traders appear cautious, preferring to wait ahead of the closely watched US consumer inflation numbers for clues on the Federal Reserve’s (Fed) policy stance. Therefore, the focus on Wednesday will remain on the crucial US Consumer Price Index (CPI), which in turn will play a key role in influencing the short-term price dynamics of the US dollar (USD) and provide fresh impetus to the currency pair.

Meanwhile, traders will look to the US Producer Price Index (PPI) on Tuesday to find short-term trading opportunities later during the early North American session. Meanwhile, markets have fully priced in a 25 basis point (bp) Fed rate cut in September and see the possibility of a larger 50 bp rate cut. This is not helping the dollar attract any significant buying, which, coupled with the Reserve Bank of Australia’s (RBA) hawkish stance, could continue to act as a tailwind for the AUD/USD pair. In fact, RBA Governor Michele Bullock said last week that the central bank would not hesitate to raise rates in the face of further upside risks to inflation.

Meanwhile, the Australian Bureau of Statistics reported on Tuesday that the wage price index remained high in the three months to June, rising 4.1% from the same period last year. On a quarterly basis, wages rose slightly slower, at 0.8%, than in the January-March quarter. Nevertheless, the data pointed to continued inflationary pressures in the economy and supported the RBA’s view that rate cuts are still a long way off. However, markets see a 50-50 chance of monetary easing in November and have fully priced in a 25 basis point rate hike in December. This, along with rising geopolitical tensions in the Middle East, is keeping the risk-sensitive Australian dollar (AUD) under pressure.

Apart from that, ongoing concerns about an economic slowdown in China – the world’s second-largest economy and Australia’s largest trading partner – are helping to cap the AUD/USD pair’s gains. Therefore, investors this week will also be keeping a close eye on Chinese macro data – industrial production and retail sales data – to be released on Thursday. Nevertheless, the fundamental backdrop mentioned above seems to favor bullish traders. However, the lack of follow-on buying warrants caution before positioning for an extension of the recent strong recovery move from the 0.6350-0.6345 area, or the lowest level since November 2023, reached last week.

Technical outlook

From a technical perspective, sustained strength and acceptance beyond the 200-day SMA hurdle around the 0.6600 level is needed to support the prospects of further gains. Given that the oscillators on the daily chart have just started moving into positive territory, the AUD/USD pair could accelerate the positive move towards the intermediate hurdle of 0.6655 en route to the 0.6675-0.6680 region and the 0.6700 level. The latter coincides with the 78.6% Fibonacci retracement level of the July-August decline, which, if decisively overcome, should allow spot prices to make another attempt to reclaim the 0.6800 level for the first time since January.

On the downside, the 0.6575-0.6570 area or the 50% Fibo level now seems to have emerged as immediate support. This is followed by support near the 0.6545 horizontal zone, the 38.2% Fibo level near the 0.6520 region and the 0.6500 psychological level. Some follow-through buying will indicate that the recent recovery move from the YTD low has run its course and trigger aggressive technical selling. The subsequent decline could drag the AUD/USD pair to the 0.6435 intermediate support, en route to the 0.6400 level and last week’s swing low, around mid-0.6300.