Australian Dollar Forecast: Dovish Fed Speculation Could Push AUD/USD Toward $0.68

The RBA Rate Path and Interest Rate Differentials

The AUD/USD pair will likely respond further to the overnight US CPI Report. US headline inflation softened by more than expected in August, putting the focus on the respective Fed and RBA interest rate trajectories.

Recent inflation data from Australia has raised investor expectations of a Q4 2024 RBA rate cut. Markets are speculating about a 25-basis point rate cut, but multiple 2024 Fed rate cuts could narrow the interest rate differential between the US and Australia.

A 50-basis point September Fed rate cut and 25-basis point rate cuts in November and December could reduce US interest rates to 4.50%. In comparison, a 25-basis point RBA rate cut would lower the Cash Rate to 4.10%, possibly pushing the AUD/USD pair toward $0.68.

Currently, the interest rate differential is 115 basis points. The last time the differential reached zero was in March 2020.

RBA Insights and RBA Rate Path

On Wednesday, RBA Chief Economist Sarah Hunter discussed the Australian labor market, supporting speculation about a Q4 2024 RBA rate cut.

She highlighted signs of a softer labor market and potential effects on wage growth that may slow further. Softer wage growth may reduce disposable income, possibly dampening consumer spending and easing demand-driven inflation pressures.

Expert Views on the RBA Rate Path

AMP Head of Investment Strategy and Chief Economist Shane Oliver recently remarked on the RBA rate path, stating,

“The resumption of share mkt weakness along with falling commodity prices & bond ylds is signalling concerns about the global economy the RBA can’t ignore.Just as the Fed has changed its tune significantly over the last few mths there is a high probability the RBA will do the same so the Australian money market’s continued pricing in of a rate cut by year end – a 0.25% rate cut is priced in with a 92% probability – may not be that outlandish, despite recent RBA guidance.”

The US Economic Calendar: Producer Prices and the Labor Market

US producer prices and jobless claims data will draw investor interest on Thursday, September 12. Both reports could influence investor sentiment toward the Fed rate path.

US Producer Prices and Demand

Economists predict producer prices will increase by 1.8% year-on-year in August, down from 2.2% in July. Lower-than-predicted figures could indicate weakening demand, which may ease demand-driven inflation. Producers typically reduce prices as demand weakens.

Weak demand could impact the US economy as private consumption contributes over 60% to GDP, possibly pushing the AUD/USD toward $0.68.

US Jobless Claims and the US Economy

Economists expect initial jobless claims to increase from 227k in the week ending August 31 to 230k in the week ending September 7. An unexpected spike in jobless claims, possibly to 250k, could retrigger fears of a hard US landing (recession).

A deteriorating labor market could affect wage growth, disposable income, and consumer confidence. The net effect could be a sharp pullback in consumer spending, adversely impacting the US economy.

Fears of a hard landing could fuel speculation about more aggressive Fed rate cuts in Q4 2024 to bolster the economy. A more dovish Fed rate path may push the AUD/USD toward $0.68.

Short-Term Forecast: Bullish

Near-term AUD/USD trends will likely depend on US inflation and US labor market data. Weaker-than-expected stats could fuel speculation about a more dovish Fed rate path, supporting an AUD/USD move toward $0.68.

Investors should monitor key economic data and central bank communications closely, as these factors may impact AUD/USD price movements. Monitor the real-time data, news updates, and expert commentary to adjust your trading strategies.

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AUD/USD Price Action

Daily Chart

The AUD/USD hovered below the 50-day EMA while remaining above the 200-day EMA, confirming bearish near-term but bullish longer-term price trends.

A break above the 50-day EMA could support a move toward the $0.67003 resistance level. Furthermore, a breakout from the $0.67003 resistance level may give the bulls a run at the $0.67500 level.

Investors should consider the inflation and labor market data from the US.

Conversely, a fall below the top trend line and 200-day EMA could give the bears a run at $0.66. Buying pressure may increase at the top trend line. The 200-day EMA is confluent with the top trend line.

With a 14-period Daily RSI reading of 47.91, the Aussie dollar may break below the 200-day EMA before entering oversold territory.