The Australian Dollar weakens amid deflation concerns in China

The Australian Dollar (AUD) dips after two consecutive days of gains against the US Dollar (USD) on Monday. The AUD/USD pair faces downward pressure following the release of China’s lower-than-expected September Consumer Price Index (CPI) data on Sunday, as China is a key trading partner for Australia.

Selling pressure on the AUD may have been influenced by a note from the Commonwealth Bank of Australia, which predicted that the Reserve Bank of Australia (RBA) could implement a 25 basis point rate cut by the end of 2024. The report emphasized that a stronger disinflationary trend than the RBA currently anticipates is needed for the Board to consider easing policy within this year.

The pair's decline is also linked to a stronger US Dollar, which has been supported by expectations that the US Federal Reserve (Fed) will ease borrowing costs at a slower pace than previously expected. According to the CME FedWatch Tool, markets are pricing in an 86.9% likelihood of a 25 basis point rate cut in November, with no expectation for a 50 basis point cut.

Daily Digest Market Movers: Australian Dollar Weakens on Lower Chinese Inflation Data

• The risk-sensitive AUD/USD pair is also under pressure from rising geopolitical tensions in the Middle East, fueling concerns of a broader regional conflict. On Sunday, a drone attack in north-central Israel resulted in the deaths of four Israeli soldiers and over 60 injuries, according to CNN.
• China’s military launched drills in the Taiwan Strait on Monday, prompting concern from the US Department of State over the People's Liberation Army’s actions. Taiwan’s Defense Ministry responded by stating, "We will not escalate conflict in our response."
• China's National Bureau of Statistics reported that the country's monthly CPI remained flat at 0% in September, down from August’s 0.4% rise. The annual inflation rate increased by 0.4%, below the expected 0.6%. Meanwhile, the Producer Price Index (PPI) fell by 2.8% year-on-year, surpassing both the previous 1.8% decline and the expected 2.5% drop.
• On Saturday, the National People’s Congress expressed optimism following a briefing from China’s Ministry of Finance (MoF), which outlined plans to stabilize the property market and address local government debt. The ministry announced special bonds would be issued to support bank recapitalization and real estate market stabilization efforts.
• In the US, the September Producer Price Index (PPI) remained unchanged at 0%, below August’s 0.2% monthly increase. The core PPI, which excludes food and energy prices, rose by 0.2%, matching expectations but down from 0.3% in the previous month.
• Chicago Fed President Austan Goolsbee praised progress on inflation and the labor market, stating that despite a strong September jobs report, there are no signs of economic overheating.
• The Reserve Bank of Australia’s September meeting minutes revealed that board members discussed potential scenarios for both raising and lowering interest rates in the future. The discussion suggested that financial conditions might need to be adjusted in either direction to achieve the Board’s objectives.

Technical Analysis: Australian Dollar Below 0.6750, Testing the Descending Channel

The AUD/USD pair trades near 0.6730 on Monday. Technical analysis of the daily chart shows the pair is testing the upper boundary of a descending channel. A successful break above this level could signal a shift from bearish to bullish momentum. However, the 14-day Relative Strength Index (RSI) remains below 50, indicating that bearish momentum still dominates.

On the upside, the AUD/USD pair may test resistance at the nine-day Exponential Moving Average (EMA) near 0.6766, followed by the psychological level of 0.6800.

On the downside, the pair could target the lower boundary of the descending channel around 0.6640, with further support at its eight-week low of 0.6622, recorded on September 11.

AUD/USD: Daily Chart