Australian Dollar rises as US Dollar falls before PMI data

• The Australian dollar is expected to gain as the US dollar weakens on Thursday.
• Australia’s manufacturing PMI held steady at 51.7 in May, while the service PMI is projected to drop to 50.5.
• Federal Reserve officials attribute the decline in consumer and business confidence to shifts in U.S. trade policies.

The Australian Dollar (AUD) is slightly up against the US Dollar (USD) after easing some gains on Thursday. The AUD/USD pair is influenced by the release of preliminary S&P Global Purchasing Managers Index (PMI) data.

The Australian Manufacturing PMI remained stable at 51.7 in May. In contrast, the service PMI is expected to decrease from a previous 51.0 to 50.5, leading to an overall drop in the combined PMI to 50.6 for May.

This week, the Reserve Bank of Australia (RBA) lowered its official cash rate (OCR) by 25 basis points on Tuesday, a move Governor Michele Brock supported, emphasizing the need to control inflation. She indicated that rate cuts were a prudent choice aimed at boosting confidence amid the current economic landscape. Further, she mentioned that the board is prepared for further action as necessary and is open to future adjustments.

Australian dollar gains in light of US dollar’s retreat

• The US Dollar Index (DXY), which tracks the USD against a basket of six major currencies, had its three-day winning streak interrupted. As of now, DXY is hovering around 99.70, slightly above a two-week low.
• Later today, data from the S&P Global US PMI is set to be released, which is expected to show stable growth in overall business activity in May, potentially bolstering the USD.
• The House Rules Committee has greenlit a cleaning bill for former President Donald Trump’s tax cuts, with full votes scheduled shortly. This approval was achieved through an 8-4 committee vote after a lengthy session on Wednesday, with discussions commencing early Thursday.
• During a panel event hosted by the Federal Reserve Bank of Atlanta, Beth Hammack and Mary C. Daly conveyed rising concerns about the US economy. Despite several strong economic indicators, they highlighted declining consumer and business trust, partly blaming shifts in US trade policy.
• Atlanta federal president Rafael Bostic elaborated on earlier comments, cautioning that the inconsistent tariff policies of the Trump era could disrupt US trade logistics, particularly affecting large imports necessary for meeting domestic demand.
• Moody’s recently downgraded the US credit rating from AAA to AA1, aligning with Fitch’s 2023 downgrade and a similar action by Standard & Poor’s in 2011. Moody’s projects the debt to rise to about 134% of GDP by 2035, up from 98% in 2023, as deficits are expected to near 9% of GDP due to soaring debt service costs and diminished tax revenues.
• Recent economic data indicated easing inflation, with both the Consumer Price Index (CPI) and Producer Price Index (PPI) showing reduced price pressures. This has led to speculation of potential interest rate cuts by the Federal Reserve in 2025, which may further weaken the USD. Dismal retail sales figures have also intensified worries over sluggish economic growth.
• On Wednesday, China’s Commerce Department labeled US actions on Chinese tech as “unilateral bullying and protectionism,” suggesting ongoing skepticism about the US’s willingness to rectify missteps.
• The People’s Bank of China (PBOC) announced a reduction in its loan prime rate (LPR) on Tuesday, lowering the one-year LPR from 3.10% to 3.00% and the five-year LPR from 3.60% to 3.50%.
• The Australian dollar has gained ground due to renewed optimism surrounding a temporary ceasefire in US-China trade tensions and hopes for more international trade agreements. That said, U.S. Treasury Secretary Scott Bescent remarked that President Trump aims to impose previously threatened tariffs on trading partners viewed as acting “in bad faith.”
• The AUD has also been impacted by political turmoil within Australia, as the opposition coalition collapsed following the Kuomintang’s withdrawal from collaboration with the Liberal Party, providing the ruling Labour Party an opportunity to consolidate power with a stronger agenda.

The Australian Dollar holds steady within a tight range

The AUD/USD pair is trading at approximately 0.6440 on Thursday. It remains above the nine-day exponential moving average (EMA), and daily technical indicators suggest a bullish trend, especially since the 14-day relative strength index (RSI) is above the 50 mark, reinforcing the continuation of upward momentum.

Immediate resistance is seen at a six-month high of 0.6515 reached on December 2, 2024. A breakthrough at this level could potentially move the pair toward a seven-month high of 0.6687, last seen in November 2024.

On the downside, the nine-day EMA at 0.6427 offers immediate support, followed by a 50-day EMA near 0.6367. A more significant downturn could jeopardize the short- to medium-term bullish outlook and could drive the rate down to at least 0.5914, a level seen in March 2020.

AUD/USD: Daily Charts