AUD/USD Drops Amid Stronger US Dollar and Tensions with China

After a four-day streak of gains, the AUD/USD experienced a decline driven by a stronger US dollar and a drop in equity prices. Market sentiment was dampened by escalating tensions between the US and China. Now, the focus shifts to upcoming US labor market data.

Recently released data from China showed that the Caixin Services PMI for June fell more than anticipated to 53.9, marking its lowest level since January. These figures might intensify calls for additional stimulus measures, weighing on market sentiment and the Australian dollar (AUD) as a result.

On Tuesday, the Reserve Bank of Australia (RBA) decided to keep the interest rate steady at 4.1%, as expected. The RBA's "hawkish hold" had limited impact on the AUD. Market expectations for a rate hike at the RBA's August meeting stand at around 40%, based on interest rate market indicators. The August meeting will also include the presentation of new macroeconomic forecasts. In terms of economic data, the revised figures for June indicate a downward revision in the Australian Services PMI from 50.7 to 50.3, and the Composite PMI from 50.5 to 50.1, reaching the lowest level since March. These numbers suggest a softening of economic activity in Australia. On Thursday, Australia is set to release its trade data for May.

Escalating tensions between the US and China, coupled with signs of economic slowdown in both China and Australia, added pressure on the AUD/USD pair. Later in the American session, the release of the Federal Open Market Committee (FOMC) minutes revealed diverging views among committee members, with some favoring a rate hike at the June meeting. On Thursday, the US economic calendar includes the ADP report, Jobless Claims, and JOLTS data, all leading up to the Non-Farm Payrolls (NFP) report scheduled for Friday.

Technical Analysis :

Our preference

Short positions below 0.6800 with targets at 0.6570 & 0.6500 in extension.

Alternative scenario

Above 0.6800 look for further upside with 0.6900 & 0.7030 as targets.

Trade active:

The AUD/USD fell sharply for the second consecutive day, briefly dipping below 0.6600 after the release of US data. The pair remains vulnerable due to a strong US dollar and risk aversion. Australian trade data revealed a 4% increase in exports for May, recovering from a 6% decline in April but still down 1.8% compared to the previous year. Imports rose by 2% in the month, up 3.4% from a year ago but lower than the 8% recorded in April. This marks the first decrease in annual export rates since March 2021, reflecting weakened demand and the fragile Chinese economic recovery, which are impacting the Australian dollar.

The US Dollar continued to strengthen on Thursday, driven by a positive ADP employment report. Private jobs increased by 497K, surpassing market expectations of 228K. Furthermore, the ISM Service PMI rose to 54.1 in June, exceeding the anticipated 51.

These encouraging economic indicators have raised expectations of further tightening of the Federal Reserve's policy. A rate hike at the next FOMC meeting is now highly anticipated, resulting in a surge in US yields, with the 2-year yield reaching levels not seen since 2007. This environment has favored the US Dollar while causing a decline in stocks. The upcoming official US employment report on Friday will be crucial. If it exceeds expectations once again, it will likely be challenging for the AUD/USD to sustain levels above 0.6600.