Australian Dollar Outlook: AUD/USD Bounce Losing Steam Ahead of US CPI

The Australian dollar enters the week on uncertain footing after its recent recovery began to lose momentum. Australian consumer and business sentiment will be monitored, but the spotlight falls on Tuesday's US CPI report and Fed Chair Kevin Warsh's congressional testimony. While CPI is likely to drive markets, traders will also be listening for any fresh policy signals from Warsh. Futures positioning, options markets and yield spreads point to growing downside risks, although a stronger US dollar may still be needed to trigger a meaningful move lower in AUD/USD.

 

 

 

Australia This Week: Economic Data and Events for AUD/USD Traders

 

Australian Business or Consumer Sentiment Unlikely to Shift the RBA

I see a lot of data points, but only one or two with real substance. Australian consumer and business sentiment will be worth monitoring, but unless they deteriorate sharply, they are unlikely to be enough for the RBA to abandon its hawkish bias. While business confidence plunged back in March after the RBA’s tightening cycle began, negativity has eased across all industries and the headline figure has recouped around half of its losses from -29 to -14.
 

The main focus will, of course, be Tuesday's US inflation report. With inflation already expected to rise, the key question is whether the pace of the increase slows. ISM Services Prices Paid edged higher from already elevated levels, and a similar trend has emerged in recent CPI and PPI data. Producer prices and retail sales are also released on Wednesday and Thursday, although their impact will likely depend on whether Tuesday's CPI delivers any surprises.

 

US CPI Headlines a Busy Week for the US Dollar

Fed Chair Kevin Warsh's testimony before Congress will also be on traders' radar, although it may struggle to compete with US CPI for market attention. As this is one of his first major appearances as Fed chair, markets will be listening for clues on his policy stance and communication style. Unless he signals a meaningful shift in the Fed's outlook for inflation or interest rates, his remarks are unlikely to trigger a sustained move in the US dollar.

China's data dump, alongside Q2 GDP on Tuesday, also warrants a look. However, these releases have had little meaningful impact on global markets or the Australian dollar for some time.

 

 

 

AUD/USD Technical Analysis: Australian Dollar vs US Dollar

AUD/USD Futures Positioning | COT Report

Net-short exposure continued to rise for a fourth consecutive week, although the move was driven primarily by a reduction in long positions rather than a surge in fresh short selling. The 7k increase in net-short exposure among large speculators lifted their bearish positioning to a 30-week high of 25.2k contracts. Asset managers, meanwhile, reduced their net-short exposure by 1.9k contracts.

While neither group is positioned near a sentiment extreme, neither appears especially bearish either. AUD/USD posted another modest bullish week following its extended selloff, and with markets entering one of the quieter periods of the year, volatility is likely to remain subdued unless a fresh catalyst emerges.

​Source: CFTC (COT) CME, LSEG

 

 

 

 

AUD/USD Correlations

Source: LSEG

 

 

AUD/USD Technical Outlook: Risk Reversals Turn Bearish as Yield Spread Weakens

The downtrend on the daily chart remains intact, and bulls already appear to be losing momentum after a modest bounce from just below the 69c handle. Friday's bearish shooting star candle fell short of both the June 11 low (0.6979) and the monthly pivot point (0.6990), suggesting AUD/USD may be nearing the end of a three-wave countertrend bounce around its 20-day EMA.

Risk reversals have begun to turn lower, indicating that demand for puts is rising relative to calls. While they remain elevated relative to AUD/USD prices, the move points to a subtle shift in sentiment among options traders against the Aussie. More importantly, the AU-US two-year yield spread has turned lower and appears on the brink of breaking to a new cycle low. This could prove significant, as the spread led the top in AUD/USD by a couple of weeks.

While this paints a more bearish near-term picture for AUD/USD, a fresh catalyst and a notable rise in the US dollar may still be required before assuming a break below the 200-day EMA (0.6875), which sits near the lower one-week implied volatility band.

The US Dollar Index formed an inside week and a spinning top doji above the March high as prices consolidated around the 200-week EMA. If the index can hold above 100.50, the odds of renewed downside for AUD/USD remain elevated this week.

Source: ICE, TradingView

 

 

 

Australian Dollar Performance Across Major Currency Pairs

It was another mixed week for the Australian dollar, and a clear game of two halves against its commodity FX peers. This ties in with my suspicion that moves in AUD/USD could remain limited, as the bigger macro trends tend to unfold when a currency's direction is broad-based.

The Aussie was effectively flat against the Canadian dollar, with AUD/CAD mostly trading between 0.98 and 0.99 within a sideways range, despite an otherwise solid uptrend. Yet the Aussie weakened against the New Zealand dollar for a second consecutive week, sending AUD/NZD to a five-week low after the RBNZ meeting, with bears now eyeing a potential break below 1.20.

AUD/EUR rose for a second week as the Aussie gained traction against the euro, and I suspect this could be an early signal for a slightly more bullish AUD/GBP after its third consecutive weekly decline posted a particularly narrow range.

A modest recovery in risk sentiment helped the Australian dollar rise against the safe havens. A weaker yen on Friday also provided support after the Ministry of Finance (MOF) announced that large institutions are being encouraged to buy domestic assets. While the policy is supportive of the yen over the longer term, it was not an intervention. A broadly weaker Swiss franc also helped AUD/CHF climb 0.9% for its best weekly performance in three months.

Source: LSEG

 

 

 

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge