AUD embraces a turbulent July, what comes next?

The Australian dollar has experienced a "fire and ice" July, with the exchange rate of AUD/USD soaring nearly 4% in the first two weeks of the month and then turning decisively south since the 14th of July. Will the downtrend continue to the end of the month, or is there a chance to see a rebound soon?

What happened to AUD/USD

July has been a data-and-event-heavy month for the AUD/USD pair.

The first event that hit the Australian dollar was the RBA's decision to pause rates in the July interest rate meeting. Following the announcement, the AUD dipped for two consecutive days. However, shortly thereafter, cooler-than-expected inflation data in the United States challenged the strength of the US dollar and shifted support towards the Australian dollar, pushing the exchange rate towards 0.69.

Towards the mid-point of the month, on July 14th, a significant turnaround occurred for the AUD/USD pair. The Australian government announced a new RBA governor, replacing the current RBA boss Philip Lowe, who had led the RBA to raise interest rates 11 times since May 2022. As a result, the market forecasted that this may signify a new chapter for the RBA's policy cycle, with an increased likelihood of fewer rate hikes.

Furthermore, the latest economic data from China placed additional pressure on the AUD/USD pair. As a commodity currency, any signs of a slowdown in China's economic recovery will inevitably impact the demand for Australia's exports, leading to a weaker Australian dollar. As of Wednesday (July 19th), the Australian dollar has been declining for five consecutive days.

AUD/USD: what are the key challenges in store?

In fact, the volatility of the Australian dollar is likely far from over.

On Thursday, July 20th, Australia will release its unemployment rate for June. Currently, market expectations are that Australia's unemployment rate will remain at a historic low of 3.6%, indicating a sustained tight labor market. The incoming new governor of the Reserve Bank of Australia has previously stated that to maintain a sustainable and reasonable inflation rate, the unemployment rate ideally should be around 4.5%. In other words, the current unemployment rate poses a significant uncertainty to the still elevated inflation.

Additionally, even more impactful data will come in the last week of July. On July 26th, Australia will release the inflation rate for the second quarter, with market expectations at 6.3%. Although it shows a significant decrease compared to the previous quarter's 7%, Australia is likely to become one of the developed countries with the highest inflation rates. Therefore, we cannot rule out the possibility of the Reserve Bank of Australia persisting with a rate hike in August under the pressure of this trend, which could potentially lead to a strong recovery of the Australian dollar in late July.

AUD/USD Technical Analysis

Turning to the daily chart for AUD/USD, after failing to break through the key 0.69 level on July 14th, a clear double-top pattern has formed completely. The neckline of this double-top pattern aligns perfectly with the uptrend line since early June.

Currently, the AUD/USD pair is being supported at the level of 0.68, which used to be a significant resistance level from April to June this year. If the price continues to drop below this level, it may likely retest the 200-day moving average as a key support and potentially reverse the medium-term trend if moving further down.

However, from a longer term perspective, only a breach below this month-long trendline can we confirm a bear reversal for the pair.