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Summary: Rising interest rates continue to inflict more pain on the Australian economy. Institutions remain bullish on the U.S. dollar, casting uncertainty over the Australian dollar's prospects.

Fundamentals

For now, Australian consumers continue to feel the pain of rising costs and soaring interest rates. Data from the Australian Bureau of Statistics showed that household spending fell 0.7% in July from a year earlier. It was the first decline since February 2021 for the spending indicator. Discretionary spending on goods and services fell for the fourth consecutive month.

It fell 3.3% year-over-year in July as households adjusted to cost-of-living pressures. Non-discretionary spending rose 1.7%, the lowest rate of growth since early 2021. This data supports the Reserve Bank of Australia's decision to keep interest rates unchanged at their policy meeting on Tuesday.

Meanwhile, in his last public speech as RBA Governor, Philip Lowe said that for inflation to average around 2.5%, wage growth should generally be in line with productivity growth. He sees it as a "reasonable benchmark", even if it's "not a hard and fast rule".

Philip Lowe's recent attention has focused in particular on the risks associated with the current period of high inflation. Specifically, wage growth and profit growth have exceeded the level required for a sustainable return to the inflation target. He warned that in such a scenario, inflation would become "sticky", necessitating "tighter monetary policy and more economic pain later on".

Philip Low acknowledged that the recent data provided a degree of comfort, but emphasized the importance of remaining vigilant about these inflation risks. He noted that higher productivity growth would be a welcome development, as it would contribute to stronger growth in wages and profits in both nominal and real terms.

On the market front, we believe that the outlook for the AUDUSD is not out of the woods yet, with the USD's recent strength leaving contrarians perplexed. Some hedge funds also believe that the USD's rally is not yet over.

K2 Asset Management said the USD will continue to move higher as U.S. interest rates remain high.

AVM Capital expects rising U.S. Treasury yields to boost the currency. "It does look too risky to short the dollar," said George Boubouras, head of research at K2, who expects the greenback to move higher against the Australian dollar and other currencies sensitive to risk sentiment. "The higher-for-longer Fed funds rate theme will dominate and markets will start pricing in rate cuts in 2024 a number of times, we believe, unsuccessfully."

Marko Papic, chief strategist at Clocktower, considers himself "long-term" bearish on the dollar but sees room for further tactical rallies. He believes the Fed will certainly lag behind the curve in 2024 and adds that, in his view, the Fed's hope to achieve a 2% inflation target before the US elections is likely a myth.

Technical Analysis

We have discussed the technical analysis of the AUDUSD pair extensively in recent times. Today, let's shift our focus to the fundamental aspects of the U.S. dollar.

On Wednesday, better-than-expected U.S. non-manufacturing data for August improved market sentiment. Additionally, there are signs of easing inflation, moderate economic growth, and slowing labor force expansion, all of which have increased hopes that the U.S. economy will maintain resilience and avoid worse scenarios.

In comparison to the Australian economy, the better performance of the U.S. economy makes the U.S. dollar more attractive to investors. Moreover, there are indications that the Fed may maintain high interest rates over the long term.

The U.S. Dollar Index remained strong during Thursday's Asian and European trading sessions, continuing to exert pressure on the 105.00 psychological level, with the more significant resistance levels at 105.13 to 105.47. Breaking through this resistance zone will trigger a new acceleration in upward movement, exposing an initial target of 106.22. If it happens, the AUDUSD pair is likely to further decline in the near term. In terms of trading strategy, we recommend continuing our previous strategy of going short at highs.

Trading Recommendations

Trading Direction: Short

Entry Price: 0.6385

Target Price: 0.6212

Stop Loss: 0.6525

Valid Until: 2023-09-21 23:55:00

Support: 0.6359, 0.6302, 0.6260

Resistance: 0.6372, 0.6448, 0.6482