AUD/USD: Corrective risks developing ahead of Big event week?

The AUD/USD pair prolongs its bearish momentum and came under renewed selling pressure on Monday after China reported worse than expected drop in the manufacturing gauge while declining commodity prices also supported the downside bias. The latest Caixin China General Manufacturing PMI final reading stood at 47.8 versus 48.2 preliminary, witnessing sharpest deterioration in two years.

The downbeat Chinese data overshadowed unexpected improvement in Australia's AIG Performance of Manufacturing index for July which came in at 50.4 versus 44.2 last month.While gold and oil prices extended further into the negative territory exacerbating the pain in the Aussie.At the moment, AUD/USD trades -0.56% at 0.7267, heading towards 0.7232 - the lowest levels seen in last six years.

Looking ahead, the week holds great action for the AUD/USD pair which may drive the Aussie on either side. However, markets are contemplating on a correction to the upside stemming from the upcoming key events due this week – RBA cash rate decision, Aus retail sales, employment data and finally the RBA monetary policy statement. While the most influencing data this week will remain the US non-farm employment change data which may provide fresh insights on the Fed’s monetary policy outlook.

The Reserve Bank of Australia (RBA) is holding a meeting on Tuesday and is widely expected to refrain from further rate cuts and keep the cash rate steady at 2%. The Statement on Monetary Policy on Friday will be the more important event this week. Governor Stevens comments recently drove the Aussie higher as he noted that depreciation in the AUD is in effect aiding economic growth.

Moreover, broad pickup in business confidence and the outlook reflected by the recent NAB’s Business Confidence Index for June which jumped to 10 from a revised 8. This suggested that businesses are becoming more optimistic about the outlook for the economy, which may be an indication that business investment is increasing. Adding to retail sales data line up for release tomorrow is expected to show July retail sales to have picked up to 0.5% versus 0.3% recorded last month while Thursday’s employment data is expected to show job additions to the extent of 12.5k during the last month versus 7.3k gain seen previously.

Moving on to Friday crucial Fed game-changer - Wall Street is expecting a solid 225,000 increase in non-farm payrolls in July, with an unemployment rate steady at a seven-year low of 5.3%. Average hourly earnings should rebound 0.2% for the month which would have the effect of pushing the year-over-year gain to 2.3%.

Hence, against a backdrop of an avalanche of economic news due to be published from both the continents, we expect 0.72 handle to act as a critical support and may act as a reversal point for the much-anticipated correction higher in the near term. However, its worth noting that any rebound in prices is expected to remain short-lived as the Aussie is expected to break lower towards 0.7100 levels in medium -term amid downbeat fundamentals surrounding the Australian dollar.

Technically, on daily charts, the Aussie extends its downtrend in a falling wedge pattern in the making, awaiting breakout on either side. In the week ahead, as explained above, 0.72 handle will be key, below which AUD/USD could target 0.7100 levels. However, if the upcoming events turn out to be positive for the AUD, we could see a correction to the upside with the Aussie retesting the crucial 20-DMA resistance, beyond which doors will open for a test of 7460 levels – trend line resistance. Although the RSI at 34 aims lower currently, a positive price-RSI divergence could be noted on the daily charts, which could further back the case for a rebound in the commodity currency.