The Australian Dollar (AUD) edged lower on Tuesday, halting a five-day winning streak against the U.S. Dollar (USD). The AUD/USD pair is trading near 0.6550 in early European hours, weighed down by a modest recovery in the greenback as traders reassess Federal Reserve (Fed) policy expectations and await key U.S. data releases.
Fed rate cut bets vs. Dollar correction
Market conviction remains strong that the Fed will begin easing in September, with CME FedWatch showing nearly 89% odds of a 25 basis point rate cut, up from 84% a week ago. Policymakers including Fed Chair Jerome Powell and Governor Christopher Waller have signaled concern over rising risks to the labor market, reinforcing dovish expectations.
Still, the Dollar staged a rebound on Tuesday, with the U.S. Dollar Index (DXY) trading around 97.70 after five straight sessions of losses. The uptick reflects both short-term profit-taking and cautious positioning ahead of U.S. ISM Manufacturing PMI, ADP Employment, and Friday’s Nonfarm Payrolls report.
RBA outlook supported by hotter inflation
Domestically, Australian inflation surprised to the upside, with July’s Monthly Consumer Price Index rising 2.8% year-on-year, well above forecasts of 2.3%. The stronger inflation print dampened expectations of an imminent Reserve Bank of Australia (RBA) rate cut, continuing to lend support to the Aussie.
However, mixed local data paint a nuanced picture. Building permits slumped 8.2% in July, exceeding expectations for a smaller drop, while private sector credit grew at its fastest pace since April, highlighting pockets of economic resilience.
Chinese data influence remains key
As Australia’s largest trading partner, China’s economic trajectory remains a crucial driver for AUD sentiment. The Caixin Manufacturing PMI climbed back into expansion at 50.5 in August, while official NBS manufacturing data remained below 50 for a fifth straight month. A modest recovery in non-manufacturing activity offered some relief, but overall conditions point to a fragile Chinese recovery.
Political and trade tensions add uncertainty
Safe-haven flows remain in play as geopolitical risks linger. A U.S. appeals court recently upheld a ruling declaring Trump-era tariffs illegal, prompting the former president to pledge an appeal to the Supreme Court. Meanwhile, political pressure on the Fed escalated after Trump dismissed Governor Lisa Cook, raising fresh questions about the central bank’s independence.
Technical outlook: AUD/USD tests 0.6550 resistance
From a technical perspective, AUD/USD is trading above its ascending trendline and the nine-day Exponential Moving Average (EMA), reinforcing short-term bullish momentum.
-
Upside targets: Immediate resistance lies at 0.6568, the five-week high from August 14, followed by the nine-month peak of 0.6625 from July 24.
-
Downside risks: Initial support is seen at 0.6520 (trendline + nine-day EMA), followed by the 50-day EMA at 0.6502. A decisive break below this zone could expose the pair to a deeper pullback toward 0.6414, the three-month low recorded on August 21.
