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Welcome to another edition of Forex Friday, a weekly report in which we discuss selected currency themes mainly from a macro viewpoint, but we also throw in a pinch of technical analysis here and there. In this week’s shortened report, we will focus on the AUD/USD outlook as we look forward to another week full of key US data, and the RBA’s rate decision on Tuesday, July 4.

The AUD/USD outlook remains bearish as we head towards the month and quarter-end, ahead of another busy week. But after a sharp sell-off, we will need to see fresh stimulus to get the bears committed in their pursuit of a weaker exchange rate.

Why has the US dollar been rising?

The US dollar index was set to close higher for a second consecutive week, finding support against all major currencies, including the Aussie, euro, and pound. The dollar’ advance makes sense, as stronger-than-expected data was matched with hawkish Fed commentary. While the heads of the ECB and BoE have been hawkish, investors are starting to look beyond just inflation when gauging the currency market strength. Economic activity and employment have both remained resilient in the US, more than most regions of the world. As a result, the Fed will not be in a hurry to loosen its policy when inflation allows, compared to, say, the BoE or ECB.
 

Core PCE is up next

The case for at least one further Fed rate hike has increased after GDP, jobless claims, and consumer confidence all came in ahead of expectations this week. The dollar could get another shot in the arm should today’s release of US personal income data and the core PCE price index for May match or better expectations.

Core PCE is expected to show a month-over-month reading of +0.3% vs. 0.4% previously. Personal income is seen rising 0.3% m/m and income is expected to climb 0.2%.

However, in the event of a downside surprise, we may see the greenback lose some steam heading into, what could be, a long weekend for some with the July 4 holiday landing on Tuesday. If the dollar does weaken, we will look for outperformance in the likes of the pound and euro, which have been among the strongest among G10 currencies of late. The only other reason why the dollar could weaken today is we see some quarter-end rebalancing flows around key levels.
 

Next week’s key macro events

The focus will remain on the US economy with the release of several market-moving figures, including the nonfarm payrolls report on Friday.
 

RBA rate decision

Tuesday, July 4 at 05:30 BST

Before Australia’s latest inflation data was released last week, there was a 75% implied probability that the RBA would hold rates at 4.1% after surprising a hike last time. But inflation figures were quite weak, with headline CPI falling to 5.8% from 6.8%, versus 6.1% expected. This was the fastest pace of disinflation in Australia in nearly two years, raising the possibility that we are now at a peak in terms of interest rates. If the RBA holds, this could undermine the Aussie.
 

ISM services PMI

Thursday, July 6 at 15:00 BST

While the manufacturing sector activity has been weakening, the services PMI has remained just above the expansion level of 50.0 for the past three months. If we start to see renewed strength come into the services sector despite high-interest rates, then this should keep the doves at the FOMC quiet for another couple of months at least.
 

US non-farm payrolls report

Friday, July 7 at 13:30 BST

This week’s data releases were mostly positive, pointing to an economy that is continuing to defy expectations. The jobs market is particularly strong with nonfarm payrolls data beating expectations in the last 14 months in a row! Will that trend continue? If it does, it will mean interest rates will likely remain higher for longer. But that is something that could ultimately hurt market sentiment.

AUD/USD outlook: technical analysis

After a drubbing last week, the selling pressure on the Aussie eased a little at the start of the week, before it took another plunge on Wednesday in reaction to a much weaker inflation report from Australia (with headline CPI printing +5.6% vs.+ 6.1% expected and +6.8% last). Positive risk sentiment towards the end of the week (when global indices rallied) meant that the AUD/USD’s selling would ease again.

But after another week of selling pressure and the weakness in the positively-correlating Chinese yuan and given that the RBA is likely to keep policy unchanged next week, you would think that the risks remain to the downside – especially if we continue to see further strength in US data in the coming week.

 A closing break below 0.6580 support is now needed, though, to trigger fresh technical selling and get the bears to commit. Resistance is seen around 0.6670 to 0.6700 area, previously support and resistance, where we also have the 200-day MA converging. A move above this area would be a bullish development and would brighten the AUD/USD outlook.

(Click on image to enlarge)

Source: TradingView.com

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