Aussie Dollar Caught Between U.S. and China Dynamics

AUD/USD ANALYSIS & TALKING POINTS

• U.S. midterms favor AUD upside.
• China’s economic outlook remains bleak suppressing AUD gains.
• Bear flag potential on daily chart.

AUSTRALIAN DOLLAR FUNDAMENTAL BACKDROP

With the U.S. midterm elections unfolding, concerns around a Republican push to taking over Congress has led the USD lower as possible future fiscal stimulus could be replaced by Fed interest rate cuts due to a gridlocked government. This has allowed the Australian dollar to remain elevated despite worrying economic data in China – see economic calendar below:

ECONOMIC CALENDAR

Source: DailyFX economic calendar

Chinese factory gate inflation printed negatively for the first time since 2020 while headline inflation missed estimates both YoY and MoM. These figures suggest that China’s ‘zero tolerance’ COVID-19 policies have been curtailing inflationary pressures via restrained consumer demand. Commodity prices have also declined allowing for lower producer prices which leaves the commodity export forecast for Australia quite austere at this point.

Later today, we can expect further details from the U.S. midterm elections coupled with Fed speakers. U.S. inflation is the key data point this week and markets should remain relatively cautious until then.

TECHNICAL ANALYSIS

AUD/USD DAILY CHART

Chart prepared by Warren Venketas, IG

Daily AUD/USD price action shows recent AUD strength but remains constrained within a possible developing bear flag pattern (black). Fundamental headwinds for the Aussie dollar does expose further downside for the pair however, with markets being dominated by USD themes, tomorrow’s CPI print should provide some short-term directional guidance.

Key resistance levels:

Key support levels:

IG CLIENT SENTIMENT DATA: BULLISH

IGCS shows retail traders are currently LONG on AUD/USD, with 61% of traders currently holding long positions. At DailyFX we typically take a contrarian view to crowd sentiment but recent changes in long and short positioning result in a short-term upside bias.

Contact and followWarrenon Twitter:@WVenketas