AUD to USD Forecast: Australian Dollar in the Hands of the PBoC and the Fed

The People’s Bank of China and Loan Prime Rates in Focus

On Monday (May 20), the People’s Bank of China (PBoC) will put the AUD/USD in focus. After policy measures from Beijing to bolster the real estate sector, the PBoC will set the 1-year and 5-year Loan Prime Rates (LPR).

Economists expect the PBoC to leave the 1-year and 5-year LPRs unchanged at 3.45% and 3.95%, respectively.

An unexpected cut to the 1-year or 5-year LPRs could support buyer appetite for the Aussie dollar. More accommodative policy measures would reduce corporate and household lending costs and increase demand.

China accounts for one-third of Australian exports. Australia has a trade-to-GDP ratio of over 50%. Moreover, 20% of the Australian workforce is in trade-related jobs. An improving demand environment could boost the Australian economy and labor market.

However, investors should monitor RBA commentary following the recent labor market data. The unemployment rate unexpectedly increased from 3.9% to 4.1% in April. Additionally, wage growth slowed from 4.2% year-on-year in Q4 2023 to 4.1% in Q1 2024.

Deteriorating labor market conditions and softer wage growth could reduce disposable income. Downward trends in disposable income could affect household spending and dampen demand-driven inflation. The recent data reduced investor expectations of an RBA interest rate cut to tame inflation.

US Economic Calendar: FOMC Member Speeches in Focus

Later in the Monday session, FOMC member commentary warrants investor attention.

Last week, FOMC members Raphael Bostic, Loretta Mester, and Michelle Bowman warned about needing a higher-for-longer Fed rate path to bring inflation to the 2% target. Significantly, Michelle Bowman discussed an interest rate hike if inflation trended higher.

FOMC members Raphael Bostic, Christopher Waller, Michael Barr, and Philip Jefferson are on the calendar to speak. Comments about inflation and the timing of a Fed interest rate cut need consideration.

Recent inflation and retail sales figures raised investor bets on a September Fed rate cut despite the hawkish comments. According to the CME Fed WatchTool, the probability of the Fed leaving interest rates unchanged in September declined from 38.8% to 35.2% in the week ending May 17.

Increasing concern about sticky inflation could test the investor bets on a September Fed rate cut.

Short-Term Forecast

Near-term AUD/USD trends will likely hinge on the PBoC, RBA commentary, and FOMC member chatter. An unexpected cut to the LPRs could influence buyer demand for the Aussie dollar but may not immediately impact sentiment toward the RBA rate path. However, hawkish Fed chatter may reduce investor bets on a September Fed rate cut and tilt monetary policy divergence toward the US dollar.

AUD/USD Price Action

Daily Chart

The AUD/USD sat comfortably above the 50-day and 200-day EMAs, confirming the bullish price trends. Moreover, the 50-day EMA converged on the 200-day EMA. A 50-day EMA bullish cross through the 200-day EMA could send further bullish signals.

An Aussie dollar break above the $0.67003 resistance level would support a move to the $0.67500 handle. A breakout from $0.67500 could bring the $0.67967 resistance level into play.

The PBoC and FOMC member comments need consideration.

Conversely, an AUD/USD drop below the $0.66500 handle could give the bears a run at the $0.65760 support level and the EMAs. Buying pressure may intensify at the $0.65760 support level. The EMAs are confluent with the support level.

With a 14-period Daily RSI reading of 64.59, the AUD/USD may return to the $0.67500 handle before entering overbought territory.