AUD/USD Outlook: Bulls eye 50% Fibo./200-day SMA confluence on Chinese stimulus optimism

• AUD/USD jumps to over a three-month top and draws support from a combination of factors.
• Expectations that the Fed is done raising interest rates continue to weigh heavily on the USD.
• The optimism over more stimulus from China and a positive risk tone also benefits the Aussie.

The AUD/USD pair gains strong follow-through positive traction for the second successive day on Monday and climbs to over a three-month high, around the 0.6560-0.6565 region heading into the European session. The selling bias surrounding the US Dollar (USD) remains unabated in the wake of expectations that the Federal Reserve (Fed) was done with its policy tightening campaign, bolstered by the softer US CPI report released last week. Moreover, the markets are now pricing in the possibility of nearly 100 bps of Fed rate cuts by December 2024, which led to the recent sharp decline in the US Treasury bond yields. In fact, the yield on the benchmark 10-year US government bond fell to a two-month low on Friday and continues to undermine the buck.

Apart from this, the upbeat mood across the Asian equity markets drags the safe-haven Greenback to its lowest level since August 31 and turns out to be another factor benefitting the risk-sensitive Australian Dollar (AUD). Investors turned optimistic after  Chinese officials vowed to roll out more policy support for the country’s beleaguered real estate sector. Furthermore, the People’s Bank of China (PBoC) held its benchmark Loan Prime Rate (LPR) near record lows on Monday and also injected about 80 billion Yuan of liquidity into the economy. This, along with a stronger-than-expected daily midpoint USD/CNY fix by the PBoC, aided the China-proxy Aussie to build on last week's breakout momentum through the 100-day Simple Moving Average (SMA).

Moving ahead, there isn't any relevant market-moving economic data due for release from the US on Monday. Hence, traders will take cues from comments by influential FOMC members, which might influence the USD price dynamics. Apart from this, the broader risk sentiment should contribute to producing short-term trading opportunities around the AUD/USD pair ahead of the Reserve Bank of Australia (RBA) meeting minutes on Tuesday. The focus, however, will remain glued to the FOMC meeting minutes, due for release later during the US session. Investors will get a fresh insight into the rate-hike path and policymakers' view on whether the Fed should raise rates again this year. This, in turn, should provide some meaningful impetus to the buck and the pair.

Technical Outlook

From a technical perspective, last week's breakout through the 100-day SMA and a subsequent move beyond the 38.2% Fibonacci retracement level of the July-October downfall could be seen as a fresh trigger for bullish traders. Moreover, oscillators on the daily chart have been gaining positive traction and are still far from being in the overbought territory, suggesting that the path of least resistance for the AUD/USD pair is to the upside. Hence, a subsequent strength towards the 0.6590 confluence hurdle, comprising the very important 200-day SMA and the 50% Fibo. level, looks like a distinct possibility. Some follow-through buying beyond the 0.6600 mark should pave the way for additional gains towards the 61.8% Fibo. level, around the 0.6650-0.6655 area.

On the flip side, the 38.2% Fibo. resistance breakpoint, around the 0.6500 psychological mark, now seems to protect the immediate downside ahead of the 100-day SMA, currently pegged near the 0.6485 region. Any further pullback is more likely to attract fresh buyers and remain limited near the 23.6% Fibo. level, around the 0.6420-0.6415 region. This is closely followed by the 0.6400 mark, which if broken decisively might shift the bias in favour of bearish traders. The AUD/USD pair might then turn vulnerable to accelerate the slide further towards the 0.6340-0.6335 support zone before eventually dropping to the 0.6300 round figure and the YTD trough, around the 0.6270 area touched in October.