Asia Day Ahead: AUD/USD still eyeing break of trendline resistance

Asia Open

The Asian session looks set for a mixed start, with Nikkei +0.69%, ASX -0.11% and KOSPI -0.58% at the time of writing. Hong Kong market returns from its holiday break, which saw a slight edge higher as resilience in China’s Caixin manufacturing Purchasing Managers' Index (PMI) offered some calm against the weaker official PMI read released over the weekend.

However, more is needed to offer reassurances of a sustained move to the upside, as its daily relative strength index (RSI) struggles to cross above the mid-line while the Hang Seng Index (HSI) remains in a lower-high-lower-low swing since its May 2024 peak. The Nikkei has been stellar, pulling ahead from its regional peers amid a weakening yen and overnight strength in tech.

US dollar, Treasury yields may cap gains

More broadly, risk sentiments in the region may reel in from the US dollar resilience and a surge in Treasury yields overnight. This may come as a result of market participants pricing a higher odds of a Donald Trump presidency win, given that his economic agenda is likely to be inflationary.

For one, his plan for immigration could limit labour supply and drive upside risks to wage pressures, while aggressive tariffs on trading partners like China could drive higher import prices, both of which could complicate the Federal Reserve (Fed)’s fight against inflation at a time where pricing pressures are still above target.

As such, there may be some caution around what his Presidency means and whether it could even feed into the risks of stagflation, given that we have seen downside surprises in US ISM manufacturing data for the third straight month overnight. The US manufacturing PMI came in at 48.5, below the 49.1 consensus and registered its lowest read in four months.

Look-ahead: Eurozone’s inflation, Fed Chair Jerome Powell speech

The day ahead will leave some eyes on Eurozone’s inflation. With rate expectations pricing a 35% chance for another rate cut from the European Central Bank (ECB) in the July meeting, markets will be watching the upcoming inflation data for validation that the May uptick is just a blip. Any further pick-up in inflation could see markets pricing out a July rate cut amid concerns that it will take longer for inflation to return to target.

Comments from Fed Chair Jerome Powell may be on watch as well, with clues around the timing and scale of upcoming rate cuts on the radar. The recent core Personal Consumption Expenditures (PCE) price data has marked further inflation progress, so market participants will want to see how that may shift the Fed Chair’s outlook on inflation.

On the radar: AUD/USD still eyeing for a break above trendline resistance

The AUD/USD continues to hover below a key resistance trendline, as market participants await for greater catalysts to trigger an upward break. For now, its daily RSI has settled around the mid-point, which signal a fairly balanced strength in both buyers and sellers. A move above the 0.671 level could mark a break above its range and suggests buyers taking greater control. On the other hand, failure to cross above the trendline resistance could see the pair head lower towards the 0.659 level, where the lower end of its consolidation range stands.