AUD to USD Forecast: Fed Signals and China’s Growth to Influence Aussie

China Growth: Will Growth Drop Below 5%?

On Monday, July 15, Q2 GDP numbers from China will impact buyer demand for the AUD/USD.

Economists expect the Chinese economy to expand by 5.1% year-on-year in Q2 2024, down from 5.3% in Q1 2024.

Slower growth could raise doubts about China meeting its 5% growth projection for 2024.

Notably, slower growth may impact Australian trade terms, the Australian economy, and the Aussie dollar. Australia has a trade-to-GDP ratio of over 50%, with one-third of Australian exports going to China. Furthermore, 20% of the Australian workforce is in trade-related jobs.

Weaker demand from China could adversely affect labor market conditions. Softer wage growth may reduce disposable income and curb consumer spending. A pullback in consumer spending would dampen demand-driven inflation and support a more dovish RBA rate path.

Other stats from China include retail sales, industrial production, fixed asset investment, and unemployment figures. The GDP numbers will be the focal point. However, June data could provide possible demand signals for Q3 2024.

Fiscal Policy Expectations from China and The Third Plenum

The Communist Party’s Third Plenum also begins on Monday. Recent inflation numbers from China fueled speculation about further fiscal policy measures to bolster the Chinese economy. Softer-than-expected Q2 2024 economic data from China could pressure Beijing into delivering a fiscal stimulus bazooka.

However, some economists believe the Chinese government may announce moderate policies. Nataxis Asia Pacific Chief Economist Alicia Garcia Herrero recently said,

“The difficulty in simultaneously achieving both economic and fiscal targets is a key reason that only moderate policies will likely be announced. China’s future growth model requires a shift to high-skilled manufacturing and stronger local government finances, but that’s unlikely to be achieved in the short term.”

US Data: NY Empire State Manufacturing Index to Signal Economic Momentum

Later in the session on Monday, the NY Empire State Manufacturing Index will draw investor attention. The manufacturing sector accounts for less than 30% of the US economy. However, a slump in manufacturing sector activity could send recession warnings. Weak demand could spill over to the services sector.

Economists forecast the NY Empire State Manufacturing Index to remain unchanged at -6 in July. A fall below -15.6 points in May could reignite investor jitters about a hard US landing.

Beyond the numbers, investors should also monitor comments from the Fed.

Fed Chair Powell and Fed Rate Cut Bets

Fed Chair Powell is on the calendar to speak on Monday. Recent inflation figures raised investor bets on a September Fed rate cut.

According to the CME FedWatch Tool, the probability of a September rate cut surged from 77.7% on Friday, July 5, to 96.3% on Friday, July 12.

Will Fed Chair Powell greenlight a September interest rate cut?

Waning labor market conditions, softer inflation, and a contraction in the all-important US services sector supported a more dovish Fed rate path.

A dovish Fed Chair Powell could cement bets on a September Fed rate cut. Powell could also increase speculation about a possible December interest rate cut.

Short-Term Forecast: Bullish

Near-term AUD/USD trends depend on the GDP numbers from China and Fed Chair Powell. Softer-than-expected data from China could ease pressure on the RBA to raise interest rates. However, Fed Chair Powell could signal Fed rate cuts in September and December. A dovish Fed Chair could tilt monetary policy divergence toward the Aussie dollar.

Investors should remain vigilant, with the Chinese economy and Fed Chair Powell in focus. Bets on two Fed rate cuts could boost buyer demand for the AUD/USD and a return to $0.68.

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AUD/USD Price Action

Daily Chart

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

An AUD/USD breakout from the $0.67967 resistance level could signal a move to the $0.68500 handle. A return to $0.68500 may give the bulls a run at the $0.68996 resistance level.

Economic data from China and Fed Chair Powell require consideration.

Conversely, an AUD/USD break below the $0.67500 handle could bring the $0.67003 support level into play.

With a 14-period Daily RSI reading of 67.10, the AUD could break above the $0.67967 resistance level before entering overbought territory.