AUD to USD Forecast: Aussie Dollar Braces for Impact from China’s Inflation Report

China Inflation and the Aussie Dollar

On Friday, August 9, inflation numbers from China will influence buyer demand for the AUD/USD.

Economists forecast the annual inflation rate to rise from 0.2% in June to 0.3% in July.

A higher inflation rate could signal a pickup in China’s demand environment. Rising demand could boost the Aussie economy and the Australian dollar, as China accounts for one-third of Australian exports.

Australia has a trade-to-GDP ratio above 50, with 20% of its workforce in trade-related jobs. Improving trade terms with China could boost Australian labor market conditions, supporting wage growth and disposable income. Rising disposable income could drive consumer spending that contributes over 50% to the Aussie economy.

Beyond the headline CPI, investors should also consider producer price trends. Producers increase prices in a rising demand environment, passing costs on to consumers.

Economists expect producer prices to drop by 0.9% year-on-year in July after a 0.8% decline in June. A smaller-than-expected fall could signal an improving demand environment and a higher consumer price inflation outlook. A higher demand outlook may also fuel Aussie inflation and signal a more hawkish RBA rate path.

Expert Views on Aussie Inflation and the RBA

On Thursday, August 8, RBA Governor Michele Bullock warned that the RBA will not hesitate to increase interest rates if inflation takes longer than expected to return to target. StoneX Market Analyst David Scutt shared Governor Bullock’s statement from 2023 before the RBA hiked rates in November,

“Reserve Bank of Australia Gov Bullock: Vigilant to inflation risks, will not hesitate to hike if needed.”

An RBA rate hike would narrow interest rate differentials between Australia and the US and support an AUD/USD move toward $0.70.

IFM Chief Economist Alex Joiner commented on the challenges the RBA faces, saying,

“The challenge for the RBA to get inflation lower is that ideally it needs to get a greater response from services sectors. But this is largely non-discretionary spending from consumers to providers that have significant pricing power.”

US Economic Calendar

Later in the session on Friday, investors should monitor FOMC member commentary. Views on the economy, inflation, the labor market, and the Fed rate path need consideration.

Jobless claims data from Thursday eased immediate concerns about a US economic recession. Initial jobless claims dropped from 250k in the week ending July 27 to 233k in the week ending August 3.

However, continuing jobless claims increased from 1,869k in the week ending July 20 to 1,875k in the week ending July 27, the highest since November 2021.

The mixed signals could increase AUD/USD volatility as investors consider FOMC member views on the latest data.

Expert Views on the US Labor Market

Wall Street Journal Chief Economics Correspondent Nick Timiraos commented on the claims data, stating,

“Initial claims for unemployment benefits dropped to a seasonally adjusted 233,000 last week, arresting fears that the U.S. labor market is imminently weakening. Claims continue to run close to their year-earlier and the 2018-19 levels.”

FOMC Member Thomas Barkin also remarked on the US labor market, noting that firms are neither hiring nor firing, which could shift in either direction.

Notably, a shift to a firing environment could force the Fed into emergency rate cuts and push the AUD/USD toward $0.70.

Short-Term Forecast: Bullish

Near-term AUD/USD trends will depend on inflation numbers from China and central bank commentary. Better-than-expected inflation numbers could signal stronger demand and support an AUD/USD move toward $0.67.

Investors should remain alert, with economic data from China and Fed commentary influencing AUD/USD price trends. Monitor the real-time data, news updates, and expert commentary to adjust your trading strategies.

Stay updated with our latest views and analysis to manage exposures to the forex markets.

AUD/USD Price Action

Daily Chart

The AUD/USD sat below the 50-day and the 200-day EMAs, sending bearish price signals.

A break above 200-day and 50-day EMAs would support a move toward the top trend line. Furthermore, a breakout from the top trend line could give the bulls a run at the $0.67003 resistance level.

Inflation numbers from China and central bank commentary require consideration on Friday.

Conversely, a drop below the $0.65760 resistance level could signal a fall toward the $0.65 handle. A fall through the $0.65 handle may bring the $0.64582 support level into play.

With a 14-period Daily RSI reading of 48.92, the Aussie dollar may drop below the $0.64582 support level before entering oversold territory.