Is the recent rally over for ASX and AUD/USD? Where to next?

The risk-on sentiment started to fade towards the end of the financial year amid ongoing worries about high inflation and slowing economic growth. As we are approaching a new month with potentially more rate hike discussions and the start of the second-quarter reporting season, it might be sensible for traders to stick with a cautious strategy and prepare for all the uncertainties ahead.

Meanwhile, commodities hold centre stage again as the G7 leaders are working towards capping Russian oil prices in hopes of reducing the Kremlin's income from oil to finance the war. In addition, the G7 plan to announce a ban on new gold imports from Russia.

Today, we are looking at the markets below:

ASX 200

The ASX 200 has climbed nearly 5% over the past two weeks. The energy sector and utilities are the biggest winners with more than 6% gains in a week. Technology stocks soared by more than 8% last week after plunging 36% since the early days of 2022.

Although a recession in the local economy appears to be a lesser concern for Australian traders than their peers in the US, inflation concerns and a busy rate hike schedule are the main challenges for the second half of the calendar year. The RBA anticipates the consumer price index in Australia to reach 7% by the end of the year to mark a new three-decade-high. While RBA Governor Philip Lowe has ruled out a 75 basis point hike for next Tuesday's interest rate decision, the money market still expects the interest rate to rise to 3.2% in December from the current rate at 0.85%.

Daily and weekly charts show that last week's rally has potentially confirmed a short-term bottom. The 20-day moving average is now a focus on the upside at 6805.

After breaking through the 20-day moving average, the level of 6869 is now focused on the upside. While on the weekly chart, a gap between 6760-6810 will be the imminent task for bulls to conquer. Dips may find support at 6600.

AUD/USD

This week, the Australian dollar has found some support from China’s better-than-expected industrial profits data and the nation’s most recent announcement to reduce the quarantine period from 21 days to 10 days.

While the data showed declining profits for both YTD and YoY for the month of May, the declining pace has decreased significantly from the April print. As a result, the China-sensitive Australian currency has since seen some gains.

The Australian dollar is currently hovering above the 2-year-low of 0.6829. The next challenge on the upside for the pair will be around 0.6997 and 0.7074. In between, the level of 0.70 will be a critically psychological level for the pair to regain. Conversely, the risk of slipping back to below 0.69 still can’t be ruled out.

AUD/USD

This week, the Australian dollar has found some support from China’s better-than-expected industrial profits data and the nation’s most recent announcement to reduce the quarantine period from 21 days to 10 days.

While the data showed declining profits both YTD and YoY for the month of May, the declining pace has decreased significantly from the April print. As a result, the China-sensitive Australian currency has since seen some gains.

The Australian dollar is currently hovering above the 2-year-low of 0.6829. The next challenge on the upside for the pair will be around 0.6997 and 0.7074. In between, the level of 0.70 will be a critical psychologically level for the pair to regain. Conversely, the risk of slipping back to below 0.69 still can’t be ruled out.