AUD/USD Price Forecast: Bulls need to clear 0.6800 to allow for extra gains

• AUD/USD partially faded Friday’s sharp advance, faltering around 0.6800.
• The decent rebound in the Dollar prompted the knee-jerk in AUD.
• Investors’ attention now shifts to inflation figures due later in the week.

AUD/USD came short of the key barrier at 0.6800 the figure on Monday, retreating modestly on the back of an acceptable recovery in the US Dollar (USD), which regained some balance in the wake of Friday’s Powell-induced pronounced sell-off.

The upward momentum in the pair, however, appears intact, underpinned by the recent breakout above the significant 200-day SMA at 0.6608, which has shifted the outlook for AUD/USD towards a bullish one in the near term.

Despite the three-week rally, the pair has encountered a strong resistance around the 0.6800 neighbourhood so far. It’s worth noting that the current monthly rebound has been largely fueled by the consistent weakening of the Greenback and a broader recovery in risk assets.

However, an equally robust bounce in the commodity complex remains to be seem. On the latter, copper prices jumped to multi-week highs on Monday, while iron ore prices receded marginally.

Monetary policy developments have also supported the Australian dollar. Indeed, the Reserve Bank of Australia (RBA) recently held the official cash rate (OCR) at 4.35%, taking a cautious stance with no immediate plans to ease policy given the ongoing domestic inflation pressures. Both the trimmed mean and headline CPI inflation are now expected to reach the 2-3% target range by late 2026, which is later than previously anticipated.

In a subsequent speech, Governor Michelle Bullock reaffirmed the RBA’s readiness to raise interest rates if necessary to manage inflation, maintaining a hawkish tone amid elevated underlying inflation. She emphasized the bank’s vigilance regarding inflation risks following the decision to keep rates steady. Core inflation, which stood at 3.9% in the last quarter, is expected to fall within the 2-3% target range by late 2025.

Bullish sentiment around the AUD has also been reinforced by the hawkish tone in the RBA Minutes released last week, where members debated whether to raise the cash rate target or keep it unchanged. The argument for an increase was supported by ongoing underlying inflation and the need to counteract market expectations of multiple rate cuts later in 2024. Ultimately, the members decided that maintaining the current cash rate target was the best option. They also agreed that a rate cut in the near term is unlikely, although future adjustments to the rate target remain possible.

Overall, the RBA is expected to be the last among the G10 central banks to start cutting interest rates.

Expectations of Federal Reserve (Fed) easing have prompted traders to speculate that the RBA might cut rates as early as November, with the odds roughly around 50%. A rate cut by the end of the year is fully anticipated. That decision, however, remains uncertain, as much will depend on upcoming data. The inflation report for July, set to be released later this week, is expected to reveal a significant slowdown in headline inflation to 3.4%, down from 3.8%, largely due to government rebates on electricity bills.

That said, the potential for rate cuts by the Fed in the short term, contrasted with the RBA’s expected prolonged restrictive stance, should support a stronger AUD/USD in the coming months.

However, a sluggish recovery in the Chinese economy may cap the Australian dollar’s gains. China continues to grapple with post-pandemic challenges like deflation and inadequate stimulus. Concerns about demand from China, the world’s second-largest economy, were heightened following the Politburo meeting, which, despite pledges of support, did not introduce specific new stimulus measures.

Meanwhile, the latest CFTC report for the week ending August 20 reveals that speculators remained largely net-short on the AUD, although they trimmed their positions to three-week lows. Net shorts have dominated since Q2 2021, with only a brief two-week interruption so far this year.

AUD/USD daily chart

AUD/USD short-term technical outlook

Further increases are expected to take the AUD/USD to its August peak of 0.6798 (August 23), ahead of the December 2023 high of 0.6871 (December 28).

Occasional bearish efforts, on the other hand, may cause an initial decline to the temporary 55-day SMA of 0.6649, prior to the crucial 200-day SMA of 0.6608, and the 2024 low of 0.6347 (August 5).

The four-hour chart indicates that there has been some lack of upward momentum recently. However, the immediate resistance level is 0.6798, which comes before 0.6871. On the other hand, 0.6607 comes first ahead of the 200-SMA at 0.6637 and finally 0.6560. The RSI hovered around 67.