AUD/USD Forecast: Set-up favours bulls, US ISM PMI eyed for some impetus ahead of RBA on Tuesday

The AUD/USD pair retreated over 120 pips its highest level since June 17 touched on Friday, though managed to find decent support ahead of the 0.6900 mark. The intraday volatile price move was sponsored by the US dollar price dynamics amid some quarter-end position-squaring.

The USD initially rose following the release of the stronger US Personal Consumption Expenditures (PCE) price index, which accelerated to 6.8% YoY in June - the largest increase since January 1982. Excluding the volatile food and energy components, the core PCE price index - the Fed's preferred inflation gauge - shot up 0.6% and edged higher to the 4.8% YoY rate. The data revived expectations that the Fed would stick to its policy tightening path as it deems necessary. This, in turn, provided a goodish lift to the greenback and prompted some intraday selling around the AUD/USD pair.

The USD uptick, however, lacked bullish conviction and ran out of steam rather quickly after the final University of Michigan report revealed that inflation expectations slipped to 5.2% in July. Moreover, the Chicago PMI dropped to a 23-month low of 52.1 in July and revived concerns about recession, overshadowing inflation worries. Against the backdrop of a less hawkish FOMC decision last Wednesday, the incoming economic data fueled speculations that the US central bank would not raise rates as aggressively as estimated. This, in turn, acted as a headwind for the greenback.

Apart from this, a further recovery in the global risk sentiment undermined the safe-haven buck and offered support to the risk-sensitive aussie. The AUD/USD pair recovered its intraday lost ground and finally settled nearly unchanged for the day. Spot prices gained some follow-through traction during the Asian session on Monday and seemed unaffected by the disappointing Chinese Manufacturing PMI, released over the weekend. The upside, however, is likely to remain capped as investors might refrain from placing aggressive bets ahead of the Reserve Bank of Australia (RBA) policy meeting on Tuesday. The outcome would play a key role in influencing the Australian dollar.

This, along with important US macro data scheduled at the beginning of a new month would help investors to determine the next leg of a directional move for the AUD/USD pair. A packed US economic docket this week kicks off with the release of the ISM Manufacturing PMI, due later during the early North American session. The focus, meanwhile, would remain glued to the closely-watched US monthly jobs report, popularly known as NFP on Friday.

Technical Outlook

From a technical perspective, Friday's sharp intraday downfall stalled near a descending trend-line resistance breakpoint. The subsequent bounce and acceptance above the 50-day SMA favour bullish traders. Some follow-through buying beyond the 0.7000 psychological mark would reaffirm the positive outlook and pave the way for additional gains. The AUD/USD pair might then aim to surpass an intermediate hurdle near the 0.7060 region and aim to reclaim the 0.7100 mark. The momentum could lift spot prices beyond the 100-day SMA, around the 0.7115 area, towards testing the very important 200-day SMA, currently near the 0.7170 zone.

On the flip side, the 0.6940 horizontal level now seems to protect the immediate downside ahead of the 0.6910-0.6900 region. Some follow-through selling below the 0.6880-0.6875 support zone could make the AUD/USD pair vulnerable to challenging the 0.6800 round-figure mark. A convincing break below the latter would shift the bias in favour of bearish traders and expose the 0.6730 support. Spot prices could eventually drop to the 0.6700 mark en-route the YTD low, around the 0.6680 region set on July 14.