AUD/USD faces headwinds amid China’s economic woes, mixed Fed signals

  • Monday, 18 September 2023 | 3:39 AM GMT
  • China’s economic indicators signal distress, with weak retail sales, plunging imports/exports, and Evergrande’s bankruptcy filing.
  • US Federal Reserve minutes highlight commitment to 2% inflation target but voices caution against overtightening.
  • Traders eye upcoming S&P Global PMIs in Australia and a slew of US data, including Powell’s Jackson Hole speech, for directional cues.

The AUD/USD currency pair experienced minor declines, despite a weekly drop of 1.41%, as a gloomy market sentiment prevailed due to concerning developments in China’s economy, putting a damper on investor confidence. This downward trend, combined with global bond yields indicating expectations of further tightening, continued to exert pressure on the Australian Dollar (AUD) for the eighth consecutive day. The week concluded with AUD/USD trading at 0.6401, marking a 0.02% decline.

The Australian Dollar remained under duress for an extended period, primarily due to the economic turbulence in China and the impact of rising global bond yields on market sentiment.

Over the past couple of weeks, China’s economic indicators have painted a bleak picture, with weaker-than-anticipated retail sales, significant declines in both imports and exports, and a slowdown in business activity. These factors, coupled with the news of Evergrande’s bankruptcy filing in New York, have only added to the ongoing economic challenges facing the world’s second-largest economy.

Meanwhile, the recent release of the US Federal Reserve’s minutes from its monetary policy meeting held on Wednesday underscored the central bank’s determination to bring inflation back in line with its 2% target. Indeed, the majority of policymakers emphasized the need for further tightening, which deflated investors’ hopes of any signals indicating a pause or conclusion to the tightening cycle.

Nonetheless, it appears that market participants may have overreacted, as some voices within the Federal Reserve Board have been advocating against excessive tightening of monetary conditions. Regional Federal Reserve Presidents, namely Bostic, Harker, Golsbee, and Barkin, have opined that interest rates are already at restrictive levels and that the central bank could exercise patience in its future decisions. Consequently, the CME FedWatch Tool now reflects market expectations of the Federal Reserve maintaining interest rates in September, but the November meeting remains a point of uncertainty.

In the coming week, the focus of AUD/USD traders will shift to upcoming data releases. In Australia, S&P Global PMIs are anticipated to remain stable. Meanwhile, in the United States, the market will closely watch for statements from Federal Reserve officials, housing data, PMI figures, durable goods orders, and a speech by Federal Reserve Chair Jerome Powell at the Jackson Hole Symposium. These events have the potential to inject volatility into the market, particularly after a relatively calm August in terms of market fluctuations.

AUD/USD Price Analysis: Technical outlook

The downtrend in the AUD/USD pair remains in place, although it has so far been unable to close below the November 10th low of 0.6386. This has left buyers cautiously optimistic about the possibility of higher prices. However, there is a possibility that the AUD/USD could test the 0.6400 level once more, followed by a challenge of the new year-to-date (YTD) low at 0.6364. If there is a clear and decisive break below this YTD low, it could pave the way for the AUD/USD to revisit the November 3rd swing low at 0.6272, with the 0.6200 level potentially coming into play.

On the other hand, if the AUD/USD manages to hold its ground, it might aim for the May 31st low of 0.6458 before setting its sights on the 0.6500 mark as a potential target.

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