AUD/USD rebound may be short-lived

AUD/USD rebound may be short-lived

The AUD/USD's downturn continues, driven by economic data, political dynamics, and Chinese fiscal influences. The AUD/USD ended the week lower at 0.6706 (-0.63%), marking a third consecutive week of declines from the 0.6942 high reached on the last trading day of September. The AUD/USD remains under pressure from similar factors identified last week.

Economic data pressures

Building on solid momentum from the strong September United States (US) non-farm payrolls report in early October, last week's economic data exceeded expectations despite mostly being second-tier. Notably, retail sales and initial jobless claims figures surprised many, challenging even the staunchest hard-landing proponents. These data points prompted interest rate traders to revise their dovish outlook on the Federal Reserve (Fed), providing another boost to the US dollar.

Political dynamics

Although Kamala Harris holds a slim lead in national polls, the real contest is in state-level contests determined by the US Electoral College system. Trump now leads in six critical battleground states, positioning him as the favourite to retake the White House. This scenario has spurred a revival of "Trump trades," including gains for the US dollar, which stands to benefit from potential new trade tariffs and increased fiscal spending.

China’s influence and Australian outlook

The rally to the 0.6942 high in late September was partly driven by anticipation of fiscal stimulus from China following a dovish pivot. While the intent is clear, uncertainty remains about the size, timing, and content of China’s fiscal stimulus package. Hopes are now pinned on the upcoming National People's Congress standing committee meeting for clarity.

With Australia's data calendar light this week, we expect the outlined factors to dominate the AUD/USD's movement until next week’s key Australian third-quarter (Q3) consumer price index (CPI) data. The revision of Fed rate expectations and strong Australian employment data have led the Australian interest rate market to push back the expected timing of the Reserve Bank of Australia’s (RBA's) first full rate cut until April 2025. While the AUD/USD holds above the 0.6650/25 support band, it allows the current bounce to continue towards resistance at 0.6750/60. Aware that if the AUD/USD sees a sustained break below support at 0.6650/25, it could lead to a sell-off extending towards the next level of downside support at 0.6575/60 with the potential to reach 0.6500.