The Australian dollar has been on a tear recently, gaining more than 6% against the US dollar so far this year. On July 23, it touched a new 2024 high at 0.6602, reigniting investor confidence in the currency’s prospects. However, whether this rally can keep going hinges on three major risk factors: Australia’s latest inflation data, the trajectory of trade negotiations with China, and the direction of monetary policy from the Reserve Bank of Australia (RBA).
Cooling inflation may speed up rate cuts
Starting with the economic landscape—Australia’s consumer price index (CPI) rose only 2.1% year-over-year in May, the slowest pace since October 2024 and weaker than market expectations. Core inflation followed a similar trend, with the trimmed mean CPI rising just 2.4%, its lowest since late 2021.
These numbers have strengthened market expectations that the RBA is preparing to start an interest rate cutting cycle. Futures markets are now pricing in close to a 90% chance of a rate cut at the July RBA meeting and leaving room for up to three cuts this year. While the recent rally in the Aussie has been driven by investor optimism, a dovish shift in policy could cap further gains and even trigger near-term pullbacks.
China-Australia trade talks in the spotlight
China remains Australia’s largest trading partner, making trade discussions between the two countries a key focus for markets. Hopes have been rising that the two sides could make progress in areas like agriculture, energy, and supply chains. Any breakthrough would likely boost Australia’s export prospects and offer more long-term support for the Aussie.
On the flip side, if talks stall or tensions flare again, investor confidence in Australia’s economic recovery could take a hit. Heightened risk aversion might lead to renewed selling pressure on the Australian dollar. Traders should keep a close eye on developments in China-Australia relations, which have a direct impact on the currency’s trajectory.
Technical resistance ahead
On the technical front, AUD/USD has broken above key moving average levels and is currently showing a short-term bullish bias. The next major resistance level to watch is around 0.6620. A sustained break above this zone could open the door for further upside toward 0.6655 or even 0.6835.
That said, failure to break higher and signs of exhaustion—especially if RSI starts rolling over—could lead to a technical pullback. In that case, support levels around 0.6415 and even 0.6305 could come into play. With mixed signals from fundamentals and technicals, a cautious strategy is warranted in the short run.
Don’t overlook USD strength
Another variable that could sway AUD’s path is the direction of the US dollar. While markets were hopeful the Federal Reserve would begin cutting rates later this year, Fed Chair Jerome Powell recently dampened expectations. He emphasized that it’s premature to ease policy now, particularly with tariff-related inflation risks still looming.
This cautious Fed stance has lent support to the greenback in recent weeks, applying additional pressure on the Aussie. A persistently strong dollar could weigh on investor appetite for risk assets and slow down the AUD’s upward momentum.
Bottom line
Whether the Australian dollar’s rally can hold will depend on several evolving factors: the pace of inflation, whether the RBA follows through with rate cuts, progress—or lack thereof—in China-Australia trade talks, and the strength of the US dollar. Investors should stay nimble and closely monitor upcoming economic data and policy signals to navigate potential market swings.
