The AUD/USD pair remains confined to a specific trading range, yet upcoming key events could lead to increased market volatility
What's happening:
This morning, the Australian dollar gained strength after being stuck in a narrow range for the past eight trading days.
What happened:
Market sentiment improved as the US and Iran decided to halt military strikes, pushing the AUD/USD currency pair closer to multi-week highs.
Investors are anticipating inflation data this week to gain more clarity on the Reserve Bank of Australia’s future monetary policy.
Why it matters:
The US paused bombings against Iran following two weeks of conflict, causing Tehran to cease its counterattacks. Admiral Brad Cooper, Chief of the US Central Command, noted a shortage of interceptors at US bases and advised President Donald Trump that additional strikes held limited strategic value.
President Trump concurred, opting to halt further strikes to allow potential negotiations. Concurrently, Iran engaged in discussions with Oman concerning the Strait of Hormuz.
With Australia’s CPI data expected this week, there is widespread expectation among investors that the Reserve Bank of Australia will raise its cash rate by year-end. Some predict this could happen in August, but markets have fully priced in a rate hike by November.
A dip in the US dollar also provided support to the AUD/USD pair. The US dollar index, which tracks the greenback's performance against a basket of major currencies, dipped around 0.1% to 101.38 this morning.
The AUD/USD currency pair increased by more than 0.3% to trade at 0.7003 this morning, nearing its multi-week highs once again, while the S&P/ASX 200 surged over 1% to reach 8,862.70.
What to watch:
Investors will focus on any new developments regarding the US-Iran conflict.
Australia’s inflation rate data will be released on Wednesday. Analysts expect core inflation to rise by 0.9% for the quarter, elevating the annual rate to 3.7% from the previous 3.5%.
A Technical Analysis of the AUD/USD Currency Pair
The daily chart shows a gradual upward trend for the AUD/USD pair in recent days, forming an ascending channel and currently trading near its lower edge. This suggests the possibility of a bearish flag pattern emerging.
Technically, the pair is still below the 50-day Exponential Moving Average. Moreover, the Relative Strength Index has risen from an oversold 29 to its current level of 50.
Consequently, the pair might experience a significant bearish breakout, potentially dropping to this month's low of 0.6865. However, if it moves above the critical resistance level of 0.7050, it could challenge this bearish outlook.
The Dollar Index, which gauges the strength of the US dollar relative to a basket of significant currencies, held at about 101.50 points after hitting its highest level since early July. The euro saw a slight increase of 0.05% to reach $1.1370, the dollar remained steady at 163.745 Japanese yen, and the British pound inched up by 0.1% to $1.330.
Inflation Concerns and Bond Yields Strengthen the US Currency
Inflation concerns and rising bond yields have bolstered the US currency, as recent shifts in market sentiment towards US monetary policy have emerged. Since April, Treasury yields have been climbing, spurred by worries over inflation linked to geopolitical tensions and increasing energy costs, alongside a more proactive approach by Federal Reserve official Kevin Warsh.
Despite a decline in oil prices following the US's decision to halt attacks on Iran earlier in the week, US bond yields continue to remain close to their highest levels in several months.
Markets Brace for Fed Decision Amid Rising Rate Hike Expectations
The Federal Reserve is poised to conclude its two-day monetary policy meeting on Wednesday, with increasing speculation from major financial institutions about a potential interest rate increase, spurred by the recent spike in oil prices.
Data from the London Stock Exchange Group indicates that the probability of a 25-basis-point rate hike has risen to approximately 40%, up from about 20% just a week ago. Additionally, traders are attributing a 95% likelihood to a rate hike by September.
Focus on US Ecnomic Data
This week, attention is focused on the release of critical US economic figures, especially the second-quarter GDP and core Personal Consumption Expenditures (PCE) inflation data, which serve as the Federal Reserve's main inflation measure.
In currency markets, the Australian dollar dipped by 0.3% to $0.697 after Reserve Bank of Australia Governor Michele Bullock highlighted persistent core inflation. She suggested that reducing domestic demand might be necessary to tackle rising prices. Meanwhile, the New Zealand dollar remained stable at $0.5772.
In the cryptocurrency arena, Bitcoin declined by 2.3%, settling at $63,414.16. Ether faced a 3.4% drop to $1,879.71, marking its most significant single-day decrease in a month.