AUD/USD traded quietly below 0.7200 after China’s RatingDog Manufacturing PMI eased to 51.8 in May from 52.2, while holding near the two-week high posted on Friday. Price action stayed range-bound, yet the earlier move through 0.7180 drew attention because it cleared a confluence of the 100-period SMA on the 4-hour chart and the 50% Fibonacci retracement of the May downswing. Momentum gauges were mixed but supportive, with RSI near 60 and MACD remaining in positive territory.

Headwinds were linked to geopolitical uncertainty and firmer expectations for a hawkish Fed stance, which helped the USD recover from Friday’s two-week low. Reduced pricing for a June RBA hike was also cited as a potential cap, with resistance levels marked at the 61.8% retracement at 0.7198, then 0.7230 at the 78.6% level, and the cycle high zone near 0.7271. Support was placed at the 100-period SMA at 0.7177 alongside the 50% retracement at 0.7175, followed by 0.7153 at the 38.2% level, then 0.7125 at 23.6% and the swing low around 0.7079.

Technical Setup and Fundamental Headwinds

We see the AUD/USD pair holding near its two-week peak, though the 0.7200 level is proving to be a challenge. The technical setup looks constructive after breaking the 0.7180 hurdle, suggesting more upside is possible. However, fundamental factors are creating a headwind for any significant rally.

Reduced bets for a June interest rate hike by the Reserve Bank of Australia will likely cap gains, especially as we look towards the next meeting on June 18th. Markets are currently pricing in less than a 15% chance of a hike, particularly after the latest monthly CPI indicator showed annual inflation easing to 3.6%. The mixed China PMI data, with the official reading unexpectedly contracting to 49.5 while the Caixin survey expanded to 51.7, adds to this cautious outlook.

At the same time, the US dollar is finding support from a hawkish Federal Reserve. The core PCE price index, the Fed’s preferred inflation gauge, remains stubbornly above target at 2.8% year-over-year, reinforcing the Fed’s patient stance on rate cuts. This persistent policy difference between a neutral RBA and a cautious Fed should limit how far the AUD/USD can climb.

Trading Strategy and Key Levels

Given this capped upside, we believe selling out-of-the-money call options or implementing bear call spreads with strikes near the 0.7230 or 0.7270 resistance levels could be a prudent strategy. This approach allows us to collect premium while acknowledging the strong technical and fundamental resistance overhead. Historically, the AUD/USD has underperformed during periods of sharp monetary policy divergence, similar to the dynamic we saw in late 2023.

For those anticipating a turn lower, buying puts or establishing bear put spreads could be considered if the pair breaks decisively below the key 0.7175 support zone. A move below this level would signal that the recent upward momentum has failed. The next major support levels to watch would be around 0.7153 and then 0.7125.