AUD/USD forecast: Currency Pair of the Week - September 23, 2024

The AUD/USD will be in sharp focus this week with the RBA rate decision, Aussie CPI and US Core PCE price index all due for release later in the week. It is our therefore our featured currency pair of the week. Following the Fed’s 50 basis point rate cut last week, the US dollar has remained under mild pressure against the Aussie and other commodity dollars. The AUD/USD has broken above 0.6850 to reach its highest level since December, when it peaked just beneath the 0.6900 handle. Unless the RBA is surprisingly more dovish than expected at its meeting on Tuesday, Aussie CPI comes in well below expectations on Wednesday, or we see a sharp reversal in risk appetite, the path of least resistance will remain to the upside, in line with our continued bullish AUD/USD forecast.

Before discussing the week’s main macro drivers, let’s first take a look at the AUD/USD chart:

AUD/USD forecast: key levels to watch

Source: TradingView.com

The AUD/USD’s recent move higher has been a real struggle. Concerns over China (Australia’s largest trading partner) and weakness in domestic data has held rates back from staging a more significant rally in light of the Fed’s pivot. So, any bearish technical signs that might emerge this week should not be taken lightly, as rates could easily reverse. The key support levels that need to hold now include 0.6800, 0.6750 and 0.6700. The line in the sand for me now us at 0.6620, marking the recent low and the 200-day average. If rates were to break below this level in the coming days, this would be a clear bearish development. On the upside meanwhile, 0.6870-0.6900 is the next resistance area of the psychologically-important 0.70 handle.

RBA seen holding steady ahead of Aussie CPI

The Reserve Bank of Australia’s rate decision is looming large on Tuesday, at 05:30 BST. Following the Fed’s dovish rate hike last week, the focus for the AUD/USD traders will be whether the RBA will also turn dovish and signal a rate cut in the coming months. With the Aussie CPI due a day later on Wednesday, you would think the RBA will likely remain tight-lipped about a possible rate cut in the first half of next year. Indeed, RBA Governor Michele Bullock has already said that the central bank won't be swayed by other nations cutting rates, adding that rates won't be cut until inflation drops into the 2 to 3 per cent target zone. CPI fell to 3.5% y/y in July, down from 3.8% the month before. In August, it is seen easing further to 2.8% annual rate.

Will the US dollar selling stop?

For the US dollar, a lot will depend on incoming data now. The Fed was half expected to cut by 50 basis points anyway last week, and now that surprise factor looks to be priced in. Thus, for the US dollar to weaken further, traders will need to see further evidence of an economic slowdown, especially in the jobs market.

Today’s release of the PMI data was mixed, with the services sector being more or less in line with the expectation and manufacturing weakening to 47.0 from 47.9 contrary to expectations of a slight improvement. Later this week, we will have CB Consumer Confidence (Tuesday), New Home Sales (Wednesday), Final GDP estimate (Thursday) and Core PCE index (Friday) among the data highlights. Thursday will be a rather busy day for Fed speakers too.

The Fed delivered a 50-basis point rate cut last week and signalled 50 more is to come before the year is out, while lowering its growth and inflation forecasts. The Fed chief said the 50-bps cut to mark the unwinding process of its historic tightening campaign would limit the risks of a downturn while the economy is still strong, saying that future moves would be based on how the economy and inflation performs. The Fed is clearly not worried about inflation anymore, but any upside surprises in the Core PCE data could throw a spanner into the works. If so, this could turn the AUD/USD forecast bearish again.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R