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AUD/USD poised for potential breakdown and further pullback

Last week, the Reserve Bank of Australia (RBA) opted to keep its cash rate unchanged at 1.50%, as widely expected. In its statement, the RBA sounded a neutral-to-dovish tone, and was not as hawkish as some had expected. Key takeaways from the statement included the central bank’s concerns that wage growth remains slow and that the recent strength of the Australian dollar is "expected to contribute to subdued price pressures in the economy" as well as weigh on the outlook for output and employment. These dovish concerns helped to push AUD/USD down from its late-July two-year high above the key 0.8000 level.

Further weighing on AUD/USD last week was a relief rebound for the heavily-pressured US dollar, which rallied on the back of a much better-than-expected US jobs report on Friday. This week, the US dollar is slated to be further impacted by key US inflation data for July, including Thursday’s Producer Price Index (+0.1% expected) and Friday’s Consumer Price Index (+0.2% expected). This inflation data will be crucial in helping to map out the Fed’s pace of monetary policy tightening going forward. Persistently weak inflation has been one of the primary factors contributing to the Fed’s recent dovish turn.

If US inflation data exceeds expectations this week, following on the heels of last week’s stellar jobs report, the relief rebound for the US dollar could extend on expectations of a more hawkish Fed. In that event, the recent AUD/USD pullback could deepen. From a technical perspective, AUD/USD has been rising in a strong bullish trend within the past three months. The noted pullback after the late-July spike above the key 0.8000 psychological resistance level has brought the currency pair back down to short-term support around the 0.7900 level. With any major breakdown below 0.7900, the next major downside target resides around the important 0.7750-area support, which is an important previous resistance level and just below a key 61.8% Fibonacci retracement level.

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