AUD to USD Forecast: China and RBA Inflation Focus Amid Fed Rate Cut Chatter

Friday Overview of the AUD/USD

The AUD/USD gained 0.09% on Friday. Following a 0.08% rise on Thursday, the Australian dollar ended the session at $0.65629. The Australian dollar fell to a low of $0.65496 before rising to a Friday high of $0.65805.

China Stimulus Hopes and Aussie Inflation Are the Themes for the Week

It could be a pivotal week for the Aussie dollar. Last week, house prices in China fell for the seventh straight month. The numbers fueled expectations of a fiscal stimulus package from Beijing to boost the economy.

A meaningful stimulus package could drive demand, a boon for the Australian economy and the Aussie dollar. China accounts for one-third of Australian exports. With a trade-to-GDP ratio above 50%, rising demand from China would support the Australian economy. Significantly, trade-related jobs make up 20% of the Australian labor market.

In the RBA Press Conference on February 6, RBA Governor Michele Bullock stated productivity would return. The RBA Governor also affirmed that RBA staff factored China’s economic woes into the 2024-2026 RBA projections. A pickup in demand from China could influence the RBA projections and the RBA interest rate trajectory.

While China remains in the spotlight, inflation is the focal point for the RBA. On Wednesday, the Monthly CPI Indicator for January could impact bets on an RBA rate cut. Economists forecast the annual inflation rate to rise from 3.4% to 3.5% in January. An uptick in inflationary pressures would leave an RBA rate hike on the table and drive buyer demand for the AUD/USD.

US Economic Calendar: Fed Speakers Are in Focus

On Monday, new home sales and the Dallas Fed Manufacturing Index will be in focus.

Economists consider the US housing market a litmus test of the US economy. Downward trends in new home sales could signal a weaker consumer confidence environment. A weakening consumer confidence environment may impact consumer spending and dampen inflation.

Economists forecast new home sales to increase by 0.9% in January after surging 8.0% in December.

Forecasts for the Dallas Fed Manufacturing Index are US dollar-friendly. Economists expect the Dallas Fed Manufacturing Index to increase from -27.4 to -8.0 in February. An unexpected decline could show early cracks in the US economy. Texas is the largest exporter of manufactured products and ranks second, behind California, in factory production.

Fed speakers will also warrant investor attention. In recent speeches, FOMC members have warned about cutting interest rates too soon. However, Fed Vice Chair John Williams and FOMC member Harker expected the Fed to cut rates this year.

A shift to a more decisive outlook on the timeline for a Fed rate cut would influence buyer appetite for the US dollar. This week, US inflation numbers could be pivotal. Markedly softer Core PCE Price Index numbers on Thursday may refuel bets on a May Fed rate cut.

According to the CME FedWatch Tool, there was a 19.9% probability of a May Fed rate cut, down from 50.4% on January 25. However, the chances of a 25-basis point June rate cut increased from 9.2% to 54.8% over the same period.

Short-Term Forecast

Short-term AUD/USD trends will hinge on Australian and US inflation numbers. Hotter-than-expected Australian inflation numbers could tilt monetary policy divergence toward the Aussie dollar. The RBA left a rate hike on the table in the February policy decision. In contrast, the Fed is assessing the timeline for a rate cut and has yet to consider the need for a rate hike.

AUD/USD Price Action

Daily Chart

The AUD/USD hovered below the 50-day and 200-day EMAs, sending bearish price signals.

An Aussie dollar breakout from the 50-day EMA would support a move to the 200-day EMA. A break above the 50-day EMA would bring the $0.66162 resistance level into play.

China, US economic data, and Fed speakers need consideration.

However, a drop below the $0.65500 handle would give the bears a run at the $0.64900 support level.

A 14-period Daily RSI reading of 51.55 suggests an AUD/USD move the $0.66162 resistance level before entering overbought territory.

4-Hourly Chart

The AUD/USD remained above the 50-day EMA while hovering below the 200-day EMA, sending bullish near-term but bearish longer-term price signals.

An AUD/USD break above the 200-day EMA would give the bulls a run at the $0.66162 resistance level.

However, an AUD/USD break below the 50-day EMA would bring the $0.64900 support level into play.

The 14-period 4-Hourly RSI at 54.13 suggests an AUD/USD move through the $0.66162 resistance level before entering overbought territory.