AUD/USD drifted back towards the mid-0.7100s on Friday, failing to extend a bounce from sub-0.7100 levels after fresh demand for the US Dollar. The move came as markets weighed reports of a potential US-Iran peace deal against doubts over the ceasefire, while US inflation accelerated at the fastest pace in three years, reinforcing expectations of tighter Federal Reserve policy. At the same time, reduced pricing for a June rate rise by the Reserve Bank of Australia weighed on the Australian Dollar.
Technically, the pair remains capped after slipping below the 0.7180-0.7185 area, where the 100-period Simple Moving Average on the four-hour chart converges with the 23.6% Fibonacci retracement of the March-May rise. Momentum is mildly supportive, with the Relative Strength Index near 53 and the MACD line slightly positive, but a sustained break higher would be needed to target 0.7279, the four-year high set earlier this month. Support sits at 0.7109, then 0.7056 and 0.7003; a break there would expose 0.6928 and the cycle low near 0.6833.
Drivers and Fundamentals
We are seeing the AUD/USD struggle to gain traction, hovering near the 0.7150 mark as we head into June. The primary driver remains the strength of the US dollar, which is making it difficult for the pair to sustain any recovery. This confirms the bearish pressure we have been monitoring.
This morning’s US Core PCE inflation data for April came in slightly hotter than expected at 2.9% year-over-year. This has solidified market expectations for another Federal Reserve rate hike by July, keeping the dollar well-supported. Consequently, the interest rate differential continues to favor the greenback over the Aussie.
On the Australian side, recent soft retail sales figures have dampened expectations for a June interest rate hike from the Reserve Bank of Australia. The market is now pricing in a prolonged pause, which weighs heavily on the Australian dollar. This policy divergence between the RBA and the Fed is a key theme for our trading strategy.
Adding to the pressure, China’s latest manufacturing PMI barely held in expansionary territory, signaling weaker demand from Australia’s largest trading partner. We’ve also seen iron ore prices dip to around $112 per tonne, a significant drop from recent highs. These external factors provide further headwinds for the Aussie dollar.
Technical Strategy and Risk Management
From a technical standpoint, we see significant resistance at the 0.7185 level, and we are not convinced the pair has the momentum to break it. Given the fundamental backdrop, we are considering buying put options with a strike below 0.7100 to position for a potential slide towards the 0.7050 support level. This strategy allows us to capitalize on downside moves while defining our risk.
However, we must remain cautious as the pair has repeatedly found buying interest near the 0.7109 support level. A sustained break above the 0.7185 resistance would invalidate our bearish view and could signal a short squeeze. Therefore, our positions will carry tight stop-losses just above that critical zone.
