AUD/USD Maintains Its Position Above 0.6500, But Appears Vulnerable Near The Two-Month Low

Throughout the Asian session on Friday, the AUD/USD pair oscillates between modest gains and minor losses, hovering just above the 0.6500 psychological level. Spot prices, meanwhile, are within striking distance of the lowest level since early June, which was reached earlier this week, and appear susceptible to extending the recent downward trend observed over the past four weeks or so.

The US Dollar (USD) maintains yesterday's solid recovery gains from over a one-week low – reached in response to weaker US consumer inflation data – and emerges as a key factor operating as a headwind for the AUD/USD pair. The US Bureau of Labour Statistics (BLS) reported on Thursday that the headline CPI increased from 3% to 3.2% YoY in July, which was less than expected, while the Core CPI inflation (excluding volatile food and energy prices) decreased from 4.7% to 4.7%. Inflation, however, remains well above the Federal Reserve's 2% target and sustains expectations for one more 25 bps hike by the end of the year, which is expected to bolster the dollar.

In the wake of Philip Lowe's hawkish comments as governor of the Reserve Bank of Australia (RBA), the downside for the AUD/USD pair remains limited. Lowe reiterated before the House of Representatives Standing Committee on Economics that additional monetary policy tightening may be necessary to ensure that inflation returns to target within a reasonable timeframe. This, along with expectations for additional stimulus measures from China, helps limit the downside for the China-proxy Australian Dollar (AUD), at least temporarily. Concerns about China's deteriorating economic conditions, however, should discourage traders from placing aggressive bullish wagers.

The incoming Chinese macro data indicated weakening domestic demand and a faltering post-COVID recovery in the second-largest economy in the world. Wednesday's release of Chinese inflation data revealed that consumer prices fell for the first time since February 2021, and that the Producer Price Index (PPI) fell for the tenth consecutive month in July, fueling the concerns. This follows somewhat disappointing trade data released on Tuesday, which may continue to cap any meaningful upside for the China-proxy Australian dollar, at least for the time being.

The PPI, along with the Preliminary Michigan Consumer Sentiment and Inflation Expectations, are scheduled to be released later during the early North American session. Market participants are now focusing on the US economic calendar. Aside from this, the broader risk sentiment will influence demand for the safe-haven dollar and create short-term trading opportunities around the AUD/USD pair on Friday. Nonetheless, spot prices remain on pace to end in the red for the fourth consecutive week, ahead of the release of the RBA minutes and Chinese data on Monday.