Australian Dollar holds gains due to improved risk sentiment

• The AUD/USD pair edges higher following remarks from former RBA Governor Bernie Fraser.
• Bernie Fraser criticized the RBA board for being overly focused on inflation at the expense of the job market.
• Australia’s Consumer Inflation Expectations eased to 4.4% in September, down slightly from August’s four-month high of 4.5%.

The AUD/USD pair gains ground following soft Consumer Inflation Expectations from Australia released on Thursday. Additionally, the former Reserve Bank of Australia (RBA) Governor Bernie Fraser criticized the current RBA board for being overly focused on inflation at the expense of the job market. Fraser suggested that the Board should lower the cash rate, warning of “recessionary risks” that could have severe consequences for employment.

The Australian Dollar (AUD) gained support against the US Dollar (USD) as improved risk sentiment followed the release of the US inflation report on Wednesday. August’s US Consumer Price Index (CPI) data showed that headline inflation dropped to a three-year low, although core inflation exceeded expectations. This development has heightened the likelihood that the Federal Reserve (Fed) will begin its easing cycle with a 25-basis points interest rate cut in September.

On Wednesday, Sarah Hunter, the Reserve Bank of Australia’s (RBA) Assistant Governor for Economics, remarked that high interest rates are suppressing demand, which is expected to lead to a mild economic downturn. Hunter also pointed out that the labor market remains tight relative to full employment levels, with employment growth projected to continue, though slower than population growth, according to Reuters.

Daily Digest Market Movers: Australian Dollar holds ground due to improved risk sentiment

• According to the CME FedWatch Tool, markets are fully anticipating at least a 25 basis point (bps) rate cut by the Federal Reserve at its September meeting. The likelihood of a 50 bps rate cut has sharply decreased to 15.0%, down from 44.0% a week ago.
• Australia’s Consumer Inflation Expectations eased to 4.4% in September, down slightly from August’s four-month high of 4.5%. This decline highlights the central bank’s efforts to strike a balance between bringing inflation down within a reasonable timeframe and maintaining gains in the labor market.
• The US Consumer Price Index dipped to 2.5% year-on-year in August, from the previous reading of 2.9%. The index has fallen short of the expected 2.6% reading. Meanwhile, headline CPI stood at 0.2% MoM.
• US core CPI ex Food & Energy, remained unchanged at 3.2% YoY. On a monthly basis, core CPI rose to 0.3% from the previous 0.2% reading.
• The first US presidential debate between former President Donald Trump and Democratic nominee Kamala Harris in Pennsylvania was won by Harris, according to a CNN poll. The debate began with a critical focus on the economy, inflation, and economic policies.
• Morgan Stanley’s Chief China Economist, Robin Xing, stated that China is undoubtedly experiencing deflation, likely in the second stage of the process. Xing noted that Japan’s experience suggests that the longer deflation persists, the greater the need for China to implement significant stimulus measures to overcome the debt-deflation challenge, per Business Standard.
• Australia’s Westpac Consumer Confidence fell by 0.5% month-on-month in September, swinging from a 2.8% gain in August.
• China’s Trade Balance reported a trade surplus of CNY 649.34 billion for August, increasing from the previous reading of CNY 601.90 billion. Meanwhile, China’s Exports (CNY) increased by 8.4% year-on-year, following the previous rise of 6.5%.

Technical Analysis: Australian Dollar moves above 0.6650; next barrier at the nine-day EMA

The AUD/USD pair trades near 0.6680 on Thursday, with technical analysis of the daily chart indicating that it remains within a descending channel, signaling a bearish bias. The 14-day Relative Strength Index (RSI) remains below the 50 level, confirming the ongoing bearish trend.

On the downside, the AUD/USD pair could target the lower boundary of the descending channel around 0.6600. A break below this level may strengthen the bearish outlook, potentially driving the pair toward the throwback support zone near 0.6575.

On the upside, the AUD/USD pair may face resistance around the nine-day Exponential Moving Average (EMA) at 0.6694, followed by the upper boundary of the descending channel near 0.6720. A break above this upper boundary could diminish the bearish bias, potentially opening the door for the pair to retest its seven-month high of 0.6798, last seen on July 11.

AUD/USD: Daily Chart