AUD/USD Forecast: Outlook should shift to bearish below the 200-day SMA

AUD/USD extended its pronounced multi-day retracement, breaking below the 0.6600 level and flirting with the critical 200-day SMA in the vicinity of 0.6580 on Wednesday.

So far, AUD/USD has fully reversed its monthly rally, always on the back of poor economic prospects from China, falling commodity prices, occasional strength in the US Dollar (USD), and the recent interest rate cut by the People’s Bank of China (PBoC).

On the latter, the PBoC's unexpected decision to lower both short- and long-term interest rates earlier in the week negatively impacted the Chinese yuan, which in turn affected the Australian dollar due to Australia’s economic dependence on the Chinese market and the AUD’s role as a liquid proxy for the yuan.

Furthermore, incessant weakness in both copper and iron ore prices also contributed to the AUD’s sell-off, reflecting a broader decline in the commodity sector.

Regarding monetary policy, the Reserve Bank of Australia (RBA) is likely to be the last G10 central bank to start cutting interest rates.

In its latest meeting, the RBA maintained a hawkish stance, keeping the official cash rate at 4.35% and indicating flexibility for future decisions. Meeting minutes revealed that officials considered another rate hike to curb inflation but decided against it, partly due to concerns about a potential sharp slowdown in the labour market.

The RBA is in no rush to ease policy, anticipating that it will take time for inflation to consistently fall within the 2-3% target range.

Potential easing by the Federal Reserve (Fed) in the medium term, contrasted with the RBA’s likely prolonged restrictive stance, could support AUD/USD in the coming months. However, slow momentum in the Chinese economy might hinder a sustained recovery of the Aussie dollar as China continues to face post-pandemic challenges, deflation, and insufficient stimulus to spur a convincing recovery.

On the data front, July’s preliminary prints saw the Manufacturing PMI improve a tad to 47.4, and the Services PMI ease to 50.8, according to Judo Bank.

AUD/USD daily chart

AUD/USD short-term technical outlook

Further losses in the AUD/USD might find first support at the July low of 0.6583 (July 24), which coincides with the significant 200-day SMA. Down from here comes the June low of 0.6574 (June 10) seconded by the May low of 0.6465, and the 2024 bottom of 0.6362 (April 19).

Occasional bullish advances, on the other hand, should encounter an early resistance at the intermediate 55-day SMA of 0.6663, prior to the July peak of 0.6798 (July 8) and the December 2023 high of 0.6871.

Overall, the uptrend should continue as long as the AUD/USD trades above the 200-day SMA.

The 4-hour chart reveals a significant increase in the negative bias. Against this, immediate support develops at 0.6583, ahead of 0.6574. On the plus side, the first barrier is the 200-SMA of 0.6676, followed by 0.6754 and, finally, 0.6798. The RSI bounced to about 26.