AUD/USD Analysis: Bulls cheer China-led risk-on, softer USD; not out of the woods yet

The AUD/USD pair kicks off the new week on a positive note and snaps a two-day losing streak, albeit lacks bullish conviction and remains below mid-0.6400s heading into the European session. The latest optimism over new measures announced by China over the weekend, to draw investors back into its battered stock markets and the better-than-expected domestic data lend some support to the China-proxy Australian Dollar (AUD).

In fact, China's finance ministry said in a brief statement on Sunday that the stamp duty levied on stock trading will drop from 0.1% to 0.05% as of August 28, marking the first reduction since 2008 and triggering a risk-on rally. Adding to this, Chinese exchanges also lower their margin requirements and further boost investors' confidence, which is evident from a generally positive tone around the equity markets. Furthermore, the Australian Bureau of Statistics (ABS) reported that Retail Sales – a measure of the country’s consumer spending – rose 0.5% in July against consensus estimates for a 0.3% increase and the 0.8% decline registered in the previous month. This further acts as a tailwind for the Aussie, which, along with a modest US Dollar (USD) downtick, remains supportive of the intraday bid tone surrounding the AUD/USD pair.

The USD Index (DXY), which tracks the Greenback against a basket of currencies, moves away from its highest level since June 1 touched on Friday and is pressured by receding safe-haven demand. That said, any meaningful corrective decline still seems elusive in the wake of rising bets for further policy tightening by the Federal Reserve (Fed). It is worth recalling that the markets have been pricing in the possibility of one more 25 bps Fed rate hike move by the end of this year. The expectations were reaffirmed by Fed Chair Jerome Powell's hawkish remarks on Friday, saying that policymakers would proceed carefully as they decide whether to tighten further or to hold the interest rate constant. In a keynote address at the Jackson Hole Symposium, Powell added that the Fed may need to raise rates further to cool still-too-high inflation.

The outlook remains supportive of elevated US Treasury bond yields and supports prospects for the emergence of some dip-buying around the USD. Furthermore, concerns about the worsening economic conditions in China and looming recession risks should keep a lid on the optimism in the markets. This, along with expectations for another on-hold rate decision by the Reserve Bank of Australia (RBA) in September warrants caution before placing aggressive bullish bets around the AUD/USD pair. In the absence of any relevant market-moving economic releases from the US on Monday, the aforementioned fundamental backdrop makes it prudent to wait for strong follow-through buying to confirm that spot prices have bottomed out around the 0.6365 area, or the lowest level since November 2022 set earlier this month.

Technical Outlook

From a technical perspective, any subsequent move up is more likely to confront stiff resistance near the 0.6485-0.6490 zone. Some follow-through buying beyond the 0.6500 psychological mark might prompt some short-covering and pave the way for a further near-term appreciating move. Spot prices might then aim to surpass an intermediate barrier near the 0.6535-0.6540 area and reclaim the 0.6600 round figure. The next relevant hurdle is pegged near the 0.6620-0.6630 supply zone, which if cleared decisively will shift the near-term bias in favour of bullish traders.

On the flip side, the 0.6400 round-figure mark now seems to protect the immediate downside ahead of the YTD low, around the 0.6365 region. Some follow-through selling has the potential to drag the AUD/USD pair further towards the 0.6300 mark, representing the downside target of the bearish double-top chart pattern formation near the 0.6900 round figure. This is followed by support near the 0.6270 region, or the November 2022 trough, below which spot prices could accelerate the downfall further towards the 0.6200 level.