AUD/USD falls to a three-week low despite rate cuts in China

Disappointing Chinese data and strengthening US dollar impact AUD/USD

Last week, the AUD/USD closed lower at 0.6682 (-1.47%), ending its five-week winning streak. The decline began last Monday following another round of disappointing Chinese economic data.

China's gross domestic product (GDP) for the second quarter of 2024 grew by 4.7% year-on-year, falling short of the expected 5.1%. This rate is the slowest since the first quarter of 2023. Furthermore, new home prices in 70 Chinese cities dropped by 4.5% year-on-year in June, continuing a 12-month trend of declines, as efforts to reduce debt in the property market persist.

The US dollar was strengthened by unexpectedly robust US economic data, including a significant increase in retail sales and increased risk aversion, exacerbated by a global IT outage that heightened concerns just before the weekend.

Further declines influenced by PBOC rate cuts

The AUD/USD continued to struggle early this week, hitting a three-week low of 0.6662, reacting to movements in the yuan following unexpected rate cuts by the People’s Bank of China (PBOC). The PBOC lowered its main policy rate by 10 basis points (bp) to 1.7%, marking the first rate cut in a year.

Additionally, China’s 1-year loan prime rate, crucial for most corporate and household loans, was reduced by 10 bp to 3.35%, and the 5-year rate was cut to 3.85%. These cuts led the Chinese yuan to weaken to 7.2729/30 against the US dollar, close to its eight-month high of 7.2761 reached two weeks ago.

Market implications of Biden's withdrawal

Despite President Biden's recent withdrawal from the US Presidential race, the expected outcome is a Republican-controlled Congress led by former President Donald Trump, which is likely to support the US dollar.

Economic data in focus this week

This week’s local economic calendar is relatively light, featuring Australian business conditions on Wednesday and the crucial Q2 consumer price index (CPI) data due on 31 July. Markets are currently estimating a 20% likelihood of a 25 basis point rate hike by the Reserve Bank of Australia in August.

AUD/USD technical analysis

The AUD/USD is on track for a sixth straight session of falls, a move that has taken it below uptrend support at 0.6700, coming from the April 0.6362 low, and a band of horizontal support 20 pips either side of 0.6700.

If sustained over the next 24 hours, the technical damage to the uptrend caused by the recent sell-off will open the way for a retest of the 200-day moving average at 0.6580, reinforced by a cluster of lows in May and June between 0.6550 and 0.6580.

To negate the downside risks, the AUD/USD needs to rebound above a cluster of resistance in the 0.6720/40 area.

AUD/USD daily chart

• _{Source: TradingView. The figures stated are as of 22 July 2024. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}