The Australian Dollar has increased against the US Dollar for the fourth session in a row. This rise is mainly due to positive market sentiment after a trade deal was announced between the US and Japan, which sets a 15% tariff on Japanese exports. The Westpac-Melbourne Institute Leading Index showed a drop in its six-month growth rate, falling from 0.11% in May to 0.03% in June. This decline is linked to lower commodity prices and fewer hours worked. Additionally, the Reserve Bank of Australia is considering future rate cuts, depending on inflation trends.

US Dollar Index and Economic Indicators

Attention is also on the US Dollar Index, which is around 97.50. The US S&P Global Purchasing Managers Index for July is upcoming and will provide insights into the economy. President Trump’s potential trade actions with Japan and China are crucial, as Japan plans to invest $550 billion in the US under the new trade agreement. Global economic indicators, like the University of Michigan’s Consumer Sentiment Index, increased to 61.8 in July. In Asia, the People’s Bank of China’s decision to keep Loan Prime Rates unchanged could impact the Australian Dollar given the strong trade relations between China and Australia. The recent rise of the Australian Dollar above 0.6650 appears to be driven more by overall market optimism than domestic strength. The trade deal is offering a short-term boost, but the underlying economic signals in Australia are mixed. The latest monthly Consumer Price Index (CPI) from the Australian Bureau of Statistics showed a slowdown to a 3.4% annual rate, which affects the central bank’s decisions regarding rate cuts. The drop in the leading index, reflecting lower commodity prices, raises concerns. This situation puts the Reserve Bank of Australia in a tough spot. They are keeping the cash rate at 4.35% but recognize that future choices will depend on incoming data. We believe the uncertainty before the next inflation report suggests that sharp price changes are more likely than a steady trend.

US Economy and China’s Influence

On the trade front, the US economy remains strong, which may limit gains in the AUD/USD pair. The latest S&P Global US Composite PMI showed a solid score of 52.5, reflecting strong business activity and helping keep the dollar index near 97.50. If the President continues aggressive trade talks with China, demand for the US dollar as a safe haven could rise. China’s role is crucial for the Australian currency. While the one-year Loan Prime Rate remained stable, recent larger-than-expected cuts to the five-year rate signal serious concerns about their property sector. We see this as a focused stimulus, which highlights the economic challenges facing Australia’s biggest trading partner. Considering these opposing factors, we expect increased volatility rather than a clear direction. We think that buying straddles or strangles using options on the AUD/USD is a smart strategy, allowing traders to benefit from significant price movements in either direction. Historically, periods of uncertainty in central bank policies, like now, have led to spikes in implied volatility, which can favor such positions. Create your live VT Markets account and start trading now.

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