AUD/USD gains as Fed rate cut hopes overshadow weak Chinese data

AUD/USD strengthens despite weak Chinese data

The AUD/USD closed higher last week at 0.6705 (+0.30%). The currency pair's rally was supported by a rebound in global equities and a weakening US dollar, ahead of this week's Federal Open Market Committee (FOMC) meeting, which is anticipated to mark the beginning of a new easing cycle with the Federal Reserve's (Fed) first interest rate cut.

Interest rates market reprice

After falling to just a 15% chance following last Tuesday's firmer-than-expected US inflation data, the US interest rate market now assigns a greater than 50% chance of a supersized 50 basis points (bp) rate cut.

The repricing in the rates market followed an article on Friday night cited former New York Fed President Dudley, who made "a strong case for 50" regarding the Fed's potential move. Former Fed economist Sahm supported this view, pointing to progress in inflation control and a cooling labour market as the basis for a more aggressive cut. At this point, the excitement around a potential 50 bp Fed rate cut overshadows the release of another round of weak Chinese economic data over the weekend.

Concerns over Chinese economic data

While all the Chinese data was weaker than expected across industrial production, retail sales, and fixed asset investment, the most concerning was a 14th consecutive month of falling housing prices.

This month's 5.3% year-over-year (YoY) decline in Chinese house prices suggests an acceleration in deleveraging. The measures introduced by policymakers to reflate the Chinese property market and the broader economy appear to have had minimal impact.

Employment

Date: Thursday, 19 September at 11.30am AEST

In July, the Australian economy added 58,200 jobs, significantly higher than the 25,000 the market expected. The unemployment rate increased to 4.2% in July, from 4.1%, the highest since November 2021. This increase came as the participation rate surged to a record high of 67.1% from 66.9%. The July labour force report confirmed the labour market remains tight and is cooling more gradually than expected.

For August, the preliminary expectation is for the Australian economy to add 30,000 jobs and for the unemployment rate to remain at 4.2%. The Australian interest rates market is pricing in a 20 bp rate cut by the Reserve Bank of Australia (RBA) before the year-end, with a cumulative 87 bp of rate cuts expected by May 2025.

AU unemployment rate chart

Source: TradingEconomics Source: TradingEconomics

AUD/USD technical analysis

The AUD/USD remains within a messy multi-month range. It tested and rebounded from support near 0.6350 in early August and then rejected resistance above 0.6800 in late August.

AUD/USD weekly chart

Source: TradingView Source: TradingView

The AUD/USD starts the new week looking to cement its position above 0.6700 after testing and rebounding from the 200-day moving average, currently at 0.6618, last week.

If the AUD/USD holds above the 200-day moving average and then breaks above short-term resistance at 0.6730, it can extend its rebound towards the late August high near 0.6825.

AUD/USD daily chart