- The Australian dollar is set to gain more appeal as the outlook for risk improves, coinciding with a rising likelihood of a Federal Reserve rate cut in September.
- Australia’s AI Group Manufacturing PMI saw a rise of 4.9 points, while the industry index climbed 5.8 points in July.
- Trump is likely to reveal candidates for the Federal Reserve board vacancies by the weekend.
The Australian Dollar (AUD) is poised to continue its upward trend for a second consecutive day, boosted by encouraging domestic economic indicators released on Wednesday. The AUD/USD pair is benefiting from increased risk appetite as the market anticipates potential interest rate cuts by the US Federal Reserve in September.
The AI Group Manufacturing PMI in Australia increased by 4.9 points to -23.9 in July, indicating a slight improvement, yet it still points to significant contraction in the sector. In contrast, the AI Group Australian Industry Index, an essential measure of private sector activity, rose by 5.8 points to -3.2, reflecting a gradual recovery trend since mid-2024, achieving the best reading in three years.
However, the AUD might face pressure as the Reserve Bank of Australia (RBA) is expected to implement a 25 basis point cut next week, bringing cash rates down to 3.60%. In June, easing expectations rose as core inflation dropped to 2.7%, which is within the RBA’s target range of 2-3%, alongside decreasing unemployment and wage growth.
Australian dollar rises as the US dollar loses ground amid improved market sentiment
- The US Dollar Index (DXY), which gauges the strength of the US dollar against six major currencies, recorded its third consecutive day of gains, hovering around 98.80 at the time of this report.
- On Tuesday, US President Donald Trump announced plans to name a replacement for the Fed Chairman and other board members by week’s end, confirming potential choices including White House economic adviser Kevin Hassett and former Fed Governor Kevin Wahsh. He also noted that Treasury Secretary Scott Bescent was not his pick for the Fed chair.
- The Institute for Supply Management (ISM) Services PMI dropped to 50.1 in July, down from 50.8 in the prior month, missing the anticipated figure of 51.5. Additionally, ISM services prices rose from 67.5 to 69.9, while the employment index fell from 47.2 to 46.4, and the new order index decreased from 51.3 to 50.3.
- The prospects for the US dollar may not be brightening as expectations for Federal Reserve interest rate cuts grow, fueled by lackluster labor market data that raises doubts about the US economic outlook.
- Federal Reserve Governor Adriana Kugler unexpectedly resigned, heightening concerns over the independence of the Fed.
- The Trump administration dismissed Labor Statistics Bureau (BLS) committee member Erica Mantelfer following a disappointing employment report, suggesting a broader strategy to undermine confidence in official inflation data, which could influence markets and Fed policy discussions.
- In July, non-farm payrolls (NFP) in the US increased by 73,000, up from a revised 14,000 in June (initially reported as 147,000). This figure fell short of market expectations for a 110,000 increase. Furthermore, the unemployment rate nudged up to 4.2% in July from 4.1% in June.
- President Trump signed an executive order on Thursday, imposing tariffs ranging from 10% to 41% that are expected to take effect on August 1, targeting imports from numerous countries, including Canada, India, and Taiwan, which did not meet trade contract deadlines as reported by Reuters.
- The Federal Reserve opted to maintain the benchmark federal funds rate within the 4.25%-4.5% range at its widely anticipated meeting in July. Chairman Jerome Powell emphasized that the central bank has not finalized its policy stance for September, indicating the need for more time to evaluate the impact of tariffs on consumer prices.
- During the latest discussions in Stockholm, US and China failed to reach an agreement to prolong the 90-day tariff suspension, which is set to expire on August 12, leaving the final decision to President Trump. Meanwhile, US tariffs reduced from 145% to 30%, while Chinese tariffs decreased from 125% to 10%.
- China’s CAIXIN service purchase manager index surged unexpectedly from 50.6 in June to 52.6 in July, surpassing market forecasts of 50.2.
- The S&P Global Australia Composite PMI increased from 51.6 in June to 53.8 in July, marking the highest monthly growth in business activities since April 2022 and demonstrating robust expansion in the private sector.
- The TD-MI inflation gauge rose by 0.9% month-over-month in July, following its largest increase since December 2023 and a modest 0.1% rise in June. Annual inflation remained steady with a 2.4% increase. This monthly uptick raises concerns for the RBA amidst ongoing uncertainties in supply chains and consumer demand.
- Australia appears to have avoided the latest US tariff hikes, as President Trump has kept the baseline tariff on Australian goods unchanged at 10%. Moreover, subpar US employment reports have prompted market reactions favoring reduced interest rates by the Federal Reserve.
Australian Dollar Approaching 9-Day EMA Barrier Near 0.6500
On Wednesday, the AUD/USD pair was trading around 0.6480. A technical analysis of daily charts reveals a bearish inclination, as the 14-day relative strength index (RSI) is positioned below the 50 level. Additionally, the pair is trading below the nine-day exponential moving average (EMA), indicating weakened short-term momentum.
The primary support is marked at a two-month low of 0.6419 reached on August 1. A drop below this could put downward pressure on the AUD/USD pair, pushing it toward a three-month low of 0.6372 observed on June 23.
The AUD/USD pair could soon test an initial barrier at the 9-day EMA of 0.6484, followed by the 50-day EMA at 0.6493. A breakout above these thresholds may bolster short- and medium-term price momentum, allowing the pair to explore levels near 0.6625, a nine-month high.
