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Summary: The AUDUSD received some support on Monday following a drop to a 10-month low last Tuesday, thanks to a weaker US dollar. However, risk sentiment remains fragile as investors prepare for key US inflation reports and more Chinese economic data later in the week.

Fundamentals

During the Asian session on Monday, the AUDUSD saw a strong rally, benefiting from comments made by Bank of Japan Governor Kazuo Ueda over the weekend (yen strength pressuring the US dollar) and relief from concerns about Chinese deflation. This rally allowed the Australian dollar to successfully breach above the 0.6400 range by rising 0.75%. However, the gains failed to break the major resistance at 0.6465, keeping the asset within a bearish territory.

According to local media reports on Saturday, BoJ Governor Kazuo Ueda hinted at the possibility of ending the negative interest rate policy and indicated that the bank might have enough data by the end of the year to determine whether this can be done.

After the report was published, the yen rose 0.75% against the US dollar, with long-term Japanese government bond yields hitting a 2014 high. Australia's 10-year benchmark yield also rose by 5 basis points to 4.141%, causing the AUDUSD to surge at the opening.

Additionally, data released over the weekend showed that China's Consumer Price Index (CPI) returned to expansion in August, alleviating concerns about the health of the world's second-largest economy, which also had a positive impact on the Australian dollar.

Data from China indicated that inflation data improved in August, with the CPI rising 0.1% year-on-year, compared to a 0.3% decline the previous month and an expected increase of 0.2%. The Producer Price Index (PPI) fell from a year-on-year high of 4.4% in July to 3.0%, in line with market expectations.

Looking ahead to this week, the Westpac-Melbourne Institute Consumer Sentiment Index for September will be released on Tuesday. On Wednesday, investors will turn their attention to the US CPI for August, with market expectations of a 0.5% growth, while the core CPI is expected to remain at 0.2%. On Thursday, Australian employment data and US retail sales data will be in focus. These economic data releases could trigger significant volatility and provide a clear direction for the AUDUSD pair.

Overall, as US inflation slows, Chinese economic activity data shows signs of stabilization, and the European Central Bank is set to raise interest rates for the "last time" on Thursday, the momentum of the US dollar this week may lose some steam but could strengthen further in the coming quarters.

Technical Analysis

The AUDUSD saw aggressive buying during the first day of a new week and continued to maintain strong gains ahead of the New York session. The spot price is currently slightly above the midpoint of 0.6400 and continues to be supported by the weakness in the US dollar.

However, as we have consistently emphasized, short-term corrections are limited, and the asset still faces significant downside risks unless the correction exceeds the recent high point of the range-bound consolidation at the 0.6522 level. Otherwise, the downward structure is unlikely to reverse.

On the upside, earlier today, the bulls directly broke through the critical resistance near 0.6400, forming a tightening triangle. The next major resistance level is around 0.6485, and if this level is breached, the price may rise to 0.6520. Any further upside movement could potentially improve the asset's bearish pattern.

On the downside, initial support is found near the 50-hour SMA at 0.6385. The next support level is at 0.6360. Further declines may lead the asset toward the 0.6320 support level.

Overall, considering the weakness in the US dollar, it is expected that the asset will continue to trade within a wide range-bound zone, providing opportunities for both short-term buying and selling. However, from a risk-reward perspective, the path of least risk appears to be on the downside. In terms of trading strategy, going short at highs is favored.

Trading Recommendations

Trading Direction: Short

Entry Price: 0.6480

Target Price: 0.6320

Stop Loss: 0.6550

Valid Until: 2023-09-25 23:55:00

Support: 0.6415, 0.6357, 0.6320

Resistance: 0.6475, 0.6488, 0.6523