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This currency pair remained under pressure in early trade on Friday after the dollar gained ground following economic data showing producer prices increasing last month, raising expectations that the Federal Reserve could raise interest rates next week. Price action in the pair may also see further volatility later today when the Labor Department releases consumer price index data.
US Inflation Data Lifts Fed Hike Odds and Pressures AUD/USD
Positioning in the AUD/USD shifted from bullish to bearish Thursday after the Greenback strengthened following the Labor Department publishing data showing that producer prices had edged higher in August, adding further expectations that the Fed will lift its benchmark funding rate when it meets next week.
The Australian dollar could come under further pressure later today when market participants get a read on consumer inflation, which is expected to show core inflation climbing 0.2% last month, taking the annual rate to 3.4%. The report will provide the final piece of the inflation puzzle, with a surprise to the upside likely to significantly increase the likelihood of policy firming next week and trigger fresh selling in the AUD/USD.
Interest rate expectations between the Reserve Bank of Australian (RBA) and the Fed have narrowed in recent weeks following Fed Chairman Kevin Warsh’s hawkish Jackson Hole address and hotter-than-expected labor market data released earlier this month. Markets now price in a 71% chance of a September rate hike, up from about 60% before yesterday’s producer price data.
AUD/USD Breaks Its Ascending Channel Below the 200-Day Average
The pair broke down below a textbook ascending channel early on Thursday, a move that prompted further selling below the closely watched 200 moving average following the U.S. producer price index print. More recently, buyers have stepped in to mark a short-term bottom after the relative strength index (RSI) crossed into oversold territory.
AUD/USD Price Chart
AUD/USD Support Levels: 0.7145 and 0.7120 in Focus
Further selling could see the pair initially revisit the 0.7145 area. This location on the chart may act as a logical buying level near a horizontal trendline that stretches back to several minor troughs that formed late last month.
The bulls’ failure to defend this crucial support level could trigger a deeper retracement toward 0.7120. Traders may see this as a high probability location to open long positions near the prominent early September swing low, especially if it coincides with the RSI remaining near oversold levels.
AUD/USD Resistance Levels: 0.7180 and 0.7205
If the AUD/USD bottoms out at current levels, the first resistance area to monitor sits around 0.7180. The pair could run into selling pressure in this region near a horizontal line linking multiple peaks and troughs on the chart between late August and early September.
Buying above this level could see the pair test overhead resistance around 0.7205. Traders who have accumulated long positions near this month’s low may seek profit-taking opportunities on a rally toward the twin August 28 peaks, which currently closely aligns with the downward sloping 50 moving average.
H2 US CPI Could Decide Whether AUD/USD Extends Its Decline
The AUD/USD’s 2-month rally driven by expectations that the RBA could lift interest rates several times before the end of the year looks to have hit a roadblock amid a more hawkish Fed following hotter than expected readings on employment and inflation. The pair remains susceptible to fresh falls later today if U.S. consumer price index data confirms persistent inflationary pressures and further strengthen the case for a September rate hike.
Sources:
https://www.bls.gov/news.release/ppi.nr0.htm
https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
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