AUD/USD higher ahead of RBA but not yet out of the woods

Chinese policy easing, higher commodity prices give AUD a boost

The AUD/USD found support last week from improved risk sentiment, additional policy easing in China, and higher commodity prices. Further enhancing its ability to brush off softer-than-expected Australian inflation data, the AUD/USD was well supported ahead of trendline support we highlighted on August 21st.

"The .6360/50 support level holds immense importance for the AUD/USD, stemming from the uptrend support from the Covid March 2020 low of .5509 and the .6170 low of October 2022. Experience shows that multi-week/month trend support levels seldom break on the first attempt."

This week's key event on the local economic calendar that will drive the AUD/USD is tomorrow's RBA board meeting, followed by Q2 GDP on Wednesday.

What is expected from the RBA board meeting?

At its meeting in August, the RBA kept its cash on hold at 4.10% for a second consecutive month to assess the impact of a cumulative 400bp or rate hikes and evidence that a sustainable rebalancing between supply and demand is under way.

In the statement that accompanied the decision, the RBA displayed more comfort around the inflation outlook, noting that while inflation remains "still too high at 6%", recent data is "consistent with inflation returning to the 2-3 per cent target range over the forecast horizon" based on the provisor that productivity growth "picks up".

Last week, the monthly consumer price index (CPI) indicator showed that more progress is being made towards reducing inflation. Headline inflation rose by 4.9% year-over-year (YoY) from 5.4% in June. The core measure, the trimmed mean, eased to 5.6% in July from 6.0% in June.

The softer-than-expected inflation number, combined with an increase in the unemployment rate to 3.7%, tame wages growth, and an expected slowing in gross domestic product (GDP) growth on Wednesday, will likely see the RBA keep the cash rate on hold on Tuesday at 4.10%.

RBA official cash rate chart

AUD/USD technical analysis

In last week's article, we noted that providing the AUD/USD remained above weekly uptrend support at .6360/50 (from the March 2020 .5509 low), a bounce was likely, which could see the AUD/USD test resistance at .6500c and potentially beyond as part of a counter-trend rally.

Soon after the article was published, the AUD/USD rallied over 100 pips, making a double high at .6522 before retreating towards .6450 at the end of last week. This week, we are less confident about future direction, given the key macro events highlighted above and suggest using support at .6360/50 as a pivot.

While above support at .63670/50, allow for the AUD/USD to extend its recovery towards .6520 and potentially beyond. Aware that if/when the .6360/50 support level goes (closing basis), there isn't much in the way of downside support until .6200/.6170 (October 2022 low).

AUD/USD daily chart