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Summary: During the European session on Thursday, the AUDUSD retreated from its highest level in nearly four months as the market lost interest in the asset's continued rise, driven by significantly lower-than-expected inflation in Australia. Meanwhile, the ongoing challenges in China's manufacturing sector continue to weigh on the asset.

Fundamentals

Australia's Consumer Price Index (CPI) for October slowed from 5.6% to 4.9%, below the expected 5.2%. Excluding volatile items and holiday travel, the CPI growth rate slowed from 5.5% to 5.1%. The year-on-year trimmed mean CPI also decelerated from 5.4% to 5.3%.

The sectors contributing the most to the annual growth in October were housing (+6.1%), food and non-alcoholic beverages (+5.3%), and transportation (+5.9%).

In terms of market, data from the Australian Bureau of Statistics indicates that the seasonally unadjusted CPI for October recorded an annual rate of 4.9%, below the market's expected 5.2%. October inflation in Australia marked the end of two consecutive months of accelerated growth, providing support for the Reserve Bank of Australia (RBA) to temporarily halt interest rate hikes next week.

Earlier this month, the RBA raised interest rates, citing sticky inflation and economic and labor market resilience stronger than expected. The current cash rate is 4.35%, reaching a new high in 12 years, and the market believes policymakers may raise rates again before May next year. After the data release, both the Australian dollar and the yield on Australian 3-year government bonds declined, while the benchmark stock index widened its gains to 0.5%.

Additionally, pessimism in China's Purchasing Managers' Index (PMI) has also had a negative impact on the Australian dollar.

According to data from the National Bureau of Statistics of China (NBS), China's manufacturing PMI slightly decreased from 49.5 to 49.4 in November, hitting the lowest level since December 2022, below the market's expected 49.6. This decline indicates that China's manufacturing has been struggling to maintain continuous growth but has not yet overcome the negative momentum. It has contracted continuously for five months since April, briefly rebounded to expansion in September, and then slipped back into contraction in October.

NBS senior statistician Zhao Qinghe attributed this downturn to various factors, including the "traditional off-season" impact on some manufacturing and "insufficient market demand." This explanation points to the impact of cyclical and demand-driven challenges on the manufacturing sector.

In the manufacturing PMI, the new orders sub-index decreased from 49.5 to 49.4, further reflecting the challenges on the demand side. Additionally, the new export orders sub-index dropped from 46.8 to 46.3, indicating challenges in external markets and possibly reflecting global economic conditions.

The non-manufacturing PMI also experienced a decline, decreasing from 50.6 to 50.2, below the expected 51.1. However, within the non-manufacturing PMI, the sub-index for the construction industry improved from 53.5 to 55. Combining the official composite PMI for manufacturing and services, it decreased from 50.7 to 50.4.

Technical Analysis

Starting from the 2023 low of 0.6269 set in October, the AUDUSD has recorded a significant rally this month, currently hovering near a 4-month high. Now, all eyes are on momentum indicators, seeking clues about whether the current uptrend can continue.

The Average Directional Movement Index (ADX) is above the 25 threshold, indicating a strong bullish trend in the market. Similarly, the Relative Strength Index (RSI) hovers above the 50 midpoint, close to the 4-month high but seemingly struggling to make new highs. The stochastic oscillator is at the top of the overbought zone, and while it may linger there for a while, it is likely considered an early reversal signal.

If the bulls maintain confidence, they may attempt to approach the 0.6700 range. The highs on November 15, 2022, at 0.6739 and 0.6797, respectively, could test the determination of the bulls. If successful, the bulls will challenge the next key resistance at 0.6915.

On the other hand, bears are eager to halt the current bullish trend. They may try to push the asset back below the downward-sloping trendline from February 2, 2023, and the 200-day SMA at 0.6576, then test the support at 23.6% Fibonacci retracement within the range of 0.6521-0.6561. If successful, they may extend further down to the range of 0.6421-0.6471.

Overall, despite the ongoing bullish outlook for the AUDUSD, the return of bearish fundamentals may weigh on the trend structure of the asset. In terms of trading, a focus on going short at highs is recommended.

Trading Recommendations

Trading Direction: Short

Entry Price: 0.6650

Target Price: 0.6390

Stop Loss: 0.6680

Valid Until: 2023-12-14 23:55:00

Support: 0.6591, 0.6568, 0.6523

Resistance: 0.6650, 0.6677, 0.6717