AUD/USD weekly outlook: 19-month high for the Aussie

A soft landing for the US economy remains on track following upgraded GDP figures and softer-than-expected inflation. Q2 GDP was revised up to 3% in the final report, and core PCE rose a mere 0.1% m/m verses 0.2% expected. This saw the Dow Jones close at a record high, and the risk-on tone saw AUD/USD reach a 19-month high of 0.6930 to mark its first weekly close above 69c since February 2023.

AU inflation rate fell within the RBA’s target band for the first time in three years. But that is where the excitement stops. Yes, headline CPI slowed to 2.7% y/y alongside the weighted mean CPI, and CPI less ‘volatile items’ and travel is close to target at 3.1%. But it is trimmed mean inflation they really care about, which currently sits at 3.4% y/y according to the monthly report. And that means inflation likely remains “too high” for the RBA’s liking and that the 4.3% cash rate is here to stay for now.

Australian retail sales on Tuesday warrants a look to see if the Australian consumer is coping with a 4.35% cash rate. Yes, retail sales are soft overall, but they’re certainly not recessionary. So unless we are dealt an absolute shocker of a number, my guess is it will be a non-mover for the Australian dollar. The annual rate of turnover is drifting lower so there’s a reasonable chance it could continue to deteriorate. But expect some with vested interests to see what they want in the figures and call for immediate rate cuts.

US data steals the limelight once more with ISM reports for manufacturing and services ahead of Friday’s nonfarm payroll report. As per usual, USD bears will be looking for any signs of weakness to pounce upon to justify their dovish outlooks. Just keep in mind that all three of these reports did better than expected overall in the previous report, and can just as easily do so again this week. If so, that could cap gains on AUD/USD.

Jerome Powell is set to deliver opening remarks at the National Association for Business Economics 66th meeting, titled “Finding Harmony in the Noise: Transitioning to a New Normal”. We should assume it is a risk event every time he speaks, although the title leaves me little hope that it will be.

A slew of FOMC members speak throughout the week (as they really do like to hit the wires once the FOMC meeting is done and the media blackout lifted). But it remains questionable as to whether they’ll veer too far from the dot plot so close to their last meeting, which is for 25bp at the next two meetings.

China’s markets will be closed from October 1^st throughout the week as they celebrate National Day gold week, which means trading volumes (and therefore likely volatility) will be lower during Asian hours.

AUD/USD technical analysis

The fact that the US dollar index has remained above 100 despite a 50bpo Fed cut and softer-than-expected PCE inflation suggests bears are losing their grip. And that means upside surprises from US economic data could help it bounce. Add to the fact that the 100 handle resides near the 2024 open price and historical VPOC (volume point of control) and is reinforces the significance of its importance as a support level.

If so, that should provide headwinds from AUD/USD this week, and it could be argued its rally from the 0.6621 low is maturing. Add into the mix month-end-flows and I suspect we could be in for some choppy trade at the minimum, with the potential for a pullback.

Bulls may want to tread carefully around current levels, and consider waiting for entries should prices retrace towards the 0.6820 low. A break beneath which assumes a deeper pullback. But as we get into Q4, seasonality could be on thew side for a higher AUD/USD and the potential for it to eventually rise to (and above) 70c is real.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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