Australian Dollar Struggles as Market Awaits Dovish RBA Rate Cut

The Australian Dollar (AUD) faces pressure against the US Dollar (USD) as market sentiment remains cautious ahead of the Reserve Bank of Australia’s (RBA) decision on interest rates this Tuesday. The AUD/USD pair has pulled back to two-day lows and is testing the 0.6500 level amid growing expectations that the RBA will implement a 25 basis point (bps) rate cut. This would reduce the Official Cash Rate (OCR) from 3.85% to 3.6%.

AUD/USD Technical Overview

• Current Trading: 0.6516
• Resistance: The next key resistance lies at 0.6625 (July 24 high), followed by 0.6687 (November 2024 high), and the psychological 0.7000 level.
• Support: Initial support is at 0.6418 (August 1 low), followed by 0.6388 (200-day SMA) and 0.6372 (June 23 low).

The Relative Strength Index (RSI) is slightly below 50, suggesting mild downside pressure, while the Average Directional Index (ADX) near 16 points to a generally weak trend. Without any major changes from China, the US Federal Reserve (Fed), or a surprise move from the RBA, the Australian Dollar looks set to trade between 0.6400 and 0.6600 until the next significant trigger appears.

Fundamental Overview

Domestic Data: Australia’s economic data paints a mixed picture. On the positive side, Q2 CPI rose 0.7% QoQ (2.1% YoY), showing that inflation is slowing, though only gradually. Key activity indicators such as manufacturing PMI (51.6), services PMI (53.8), and retail sales (+1.2% MoM) in June point to economic resilience. However, the job market showed signs of slowing down, with only 2,000 positions added, and unemployment nudging up to 4.3%.

The trade surplus for June widened to A$5.365 billion, offering some positive momentum. However, the outlook for the Australian Dollar is weighed down by expectations of a 25 bps rate cut by the RBA on August 12.

China’s Economic Outlook: As Australia’s largest trading partner, China’s economic data is crucial. While Q2 GDP grew 5.2% YoY and industrial output increased by 7%, retail sales missed forecasts at 5%. China’s LPR (Loan Prime Rate) remains unchanged, and PMI readings suggest that the economic recovery is uneven. The trade surplus narrowed in July, indicating potential challenges ahead.

Fed Rate Outlook & Positioning: Traders are also focusing on the US Federal Reserve’s likely moves. Fed expectations are influencing the broader USD market, particularly with rising bets on more rate cuts in the months ahead. Speculative positioning, as per the CFTC data, shows that traders are heavily short on the Aussie Dollar, with net short positions at their highest since April 2024.

Outlook for AUD/USD

With the RBA’s rate decision approaching, the Australian Dollar is likely to remain vulnerable. If the RBA delivers a rate cut as expected, the AUD/USD pair could face more downside pressure. However, any surprises or hints of a less dovish stance from the RBA might support the Aussie.

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