AUD to USD Forecast: Aussie Eyes $0.70 as US Data Influence Fed Rate Cut Bets

Weekly Overview

In the week ending July 19, the AUD/USD slid by 1.45%, closing the week at $0.66842. The AUD/USD climbed to a Monday high of $0.67887 before falling to a Friday low of $0.66797.

Can the Aussie dollar retake the $0.67 handle?

Private sector PMIs from Australia could be crucial for the Aussie dollar.

Australian Services Sector in Focus

On Wednesday, July 24, Australian Services PMI numbers will influence buyer demand for the AUD/USD.

Economists forecast the Judo Bank Services PMI to fall from 51.2 in June to 50.9 in July.

Lower-than-expected numbers could ease pressure on the RBA to raise interest rates in August. The services sector contributes over 70% to the Australian economy.

However, investors should consider input and output price trends. The services sector is a major contributor to headline inflation. Higher wages (input) and output prices may raise investor bets on an RBA rate. The RBA will likely prioritize taming inflation over the economy.

Will Prices Trend Higher?

Judo Bank economist Matthew De Pasquale commented on the June Services PMI survey, stating,

“The input price index fell below 60 for the first time since 2021. This drop may, however, be short-lived and reflect end-of-financial-year deals. […]. It is also a common time for wage increases to come into effect, such as the Fair Work Commission wage decisions, which affect about 20% of Australia’s workforce.”

What Are the Odds for an RBA Rate Hike?

In June, Bloomberg TV APAC Chief Markets Editor David Ingles commented on the higher Monthly CPI Indicator for May,

“After a third hotter-than-expected Australia inflation report (note this is the monthly report not the broader quarterly data set), cash rate futures and also swaps are currently attaching a near 50-50 probability of an RBA rate HIKE in September.”

However, Luci Ellis, Chief Economist at Westpac, projected a November RBA interest rate cut.

The Australian Monthly CPI Indicator jumped from 3.6% to 4.0% in May.

China Economic Indicators: The People’s Bank of China and Loan Prime Rates

On Monday, July 22, the People’s Bank of China (PBoC) will set the one-year and five-year Loan Prime Rates (LPR).

Economists expect the LPRs to remain steady at 3.45% and 3.95%, respectively.

However, an unexpected cut could fuel demand for the Aussie dollar. Lower lending rates could drive demand for credit and increase consumption. Higher demand could boost the Australian economy through trade. China accounts for one-third of Australian exports, with Australia having a trade-to-GDP ratio of over 50%. Additionally, 20% of the Australian workforce is in trade-related jobs.

Improving trade terms with China could increase Aussie exports and trade-related jobs.

Last week, the Communist Party’s Third Plenum disappointed economists.

Nataxis Asia Pacific Chief Economist Alicia Garcia Herrero commented on the readout and press conference, stating,

“Nothing new under the sun: the same industrial policies, the same sense of things. Really no change in direction, no consumption-led growth, nothing. No sentence on the power of market forces, nothing. So, it’s really disappointing.”

Monetary policy measures to support demand could offer releif.

Amidst growing uncertainty about China and the RBA rate path, US economic indicators require consideration.

US Economic Data: Services Sector and the Fed

Economists forecast the S&P Global Services PMI, out on Wednesday, to fall from 55.3 to 55.0 in July.

Weaker-than-expected numbers would support investor expectations of multiple 2024 Fed rate cuts. The services sector accounts for over 70% of the US economy. An unexpected drop below 50 could trigger fears of a hard US landing.

However, investors should consider input and output price trends. The services sector is a major contributor to headline inflation. Upward price trends could reduce investor bets on multiple 2024 Fed rate cuts.

The US Labor Market and Economy

US labor market data and Q2 GDP numbers will require consideration on Thursday, July 25. Higher Q2 GDP numbers could ease immediate fears of a hard landing. However, labor market data may have more influence on the Fed rate path.

Economists forecast Continuing Jobless Claims by 2k to 1,869k in the week ending July 13.

Weaker labor market conditions could affect wage growth and lower disposable income. Reducing disposable income could curb consumer spending and dampen demand-driven inflation. A softer inflation outlook would support September and December Fed rate cuts.

Arch Capital Group Global Chief Economist Parker Ross reacted to the numbers for the week ending July 6, stating,

“With the latest data in hand, both initial and continuing claims remained in the gradual uptrend they have been in since the beginning of the year, with initial claims now in more of a clear uptrend than continuing claims.”

Could US Inflation Numbers Fuel Speculation About a July Fed Rate Cut?

On Friday, the US Personal Income and Outlays Report will be crucial.

Economists forecast the Core PCE Price Index to increase 2.5% year-on-year in June after a rise of 2.6% in May.

Lower-than-expected numbers could fuel speculation about a July Fed interest rate cut.

A deterioration in US labor market conditions and softer inflation could enable the Fed to move sooner to avoid a hard landing.

Beyond the inflation numbers, investors should also consider personal income and spending trends. A pullback in income and spending may signal a sustainable fall in inflation toward the Fed’s 2% target.

What Economists Say About a July Fed Rate Cut?

Wall Street Journal Chief Economics Correspondent Nick Timiraos shared comments from Goldman’s Jan Hatzius, stating,

“He writes: ‘While September remains our baseline, we see a solid rationale for already cutting in July. If the case for a cut is clear, why wait another seven weeks before delivering it?”

However, the Fed has downplayed a July Fed rate cut. Last week, NY Fed President John Williams and Fed Governor Christopher Waller signaled a September rate cut.

A lower-than-expected Core PCE Price Index, a services sector contraction, and a spike in jobless claims could change the narrative.

Short-Term Forecast:

The near-term trend for the AUD/USD will hinge on the Services PMIs, US labor market data, and the US Personal Income and Outlays Report. The US Personal Income and Outlays Report could support multiple 2024 Fed rate cuts while an RBA rate hike sits on the table. A monetary policy divergence tilt toward the Aussie dollar would support a move toward $0.70.

Investors should remain vigilant. Economic indicators from the US will be pivotal for the Fed and the AUD/USD pairing. Stay informed with our latest updates and insights to navigate the Forex markets effectively.

AUD/USD Price Action

Daily Chart

The AUD/USD sat above the 50-day and 200-day EMAs, confirming the bullish price trends.

An Aussie dollar break above the $0.67003 resistance level would support a move toward the $0.67500 handle. An AUD/USD move through the $0.67500 handle could give the bulls a run at the $0.67967 resistance level.

Policy measures from China, Service sector PMIs, and the US Personal Income and Outlays Report require consideration.

Conversely, an AUD/USD break below the top trend line and the 50-day EMA could signal a fall to the 200-day EMA. A fall through the 200-day EMA would bring the $0.65760 support level into play.

With a 14-period Daily RSI reading of 47.14, the AUD/USD could drop below the 200-day EMA before entering oversold territory.