Australian Dollar appreciates despite a stable US Dollar, ISM Manufacturing PMI eyed

• The Australian Dollar gains ground as Retail Sales exceeded the expected increase in August.
• The AUD remains solid as the RBA could keep the monetary policy restrictive in the near term.
• US ISM Manufacturing PMI is expected to improve to 47.5 in September, from the previous 47.2 reading. 

The Australian Dollar (AUD) holds gains against the US Dollar (USD) on Tuesday, following better-than-expected Retail Sales data. The Australian Bureau of Statistics (ABS) reported the primary gauge of Australia’s consumer spending, which rose 0.7% month-over-month in August, exceeding the market expectations of a 0.4% increase.

The AUD receives support from the hawkish sentiment surrounding the Reserve Bank of Australia (RBA) regarding its interest rate trajectory. The RBA kept its cash rate at 4.35% for a seventh consecutive meeting and stated that the policy would need to stay restrictive to ensure inflation slowed. Additionally, China’s stimulus measures have improved the demand outlook in Australia's largest trading partner, driving up commodity prices and strengthening the commodity-linked Australian Dollar.

The uptick in the AUD/USD pair could be restrained due to the stronger US Dollar (USD), which could be attributed to the latest remarks from the Federal Reserve (Fed) Chairman Jerome Powell. On Monday, Powell said that the central bank is not in a hurry and will lower its benchmark rate ‘over time.’ Fed Chair Powell added that the recent half-point interest rate cut should not be seen as an indication of similarly aggressive future actions, noting that upcoming rate changes are likely to be more modest.

Daily Digest Market Movers: Australian Dollar appreciates due to hawkish RBA’s policy outlook

• The CME FedWatch Tool indicates that markets are assigning a 61.8% probability to a 25 basis point rate cut by the Federal Reserve in November, while the likelihood of a 50-basis-point is 38.2%, down from 53.3% a day ago.
• China's Caixin Manufacturing Purchasing Managers' Index (PMI) fell to 49.3 in September, indicating contraction, down from 50.4 in August. Meanwhile, China’s NBS Manufacturing PMI improved to 49.8 in September, up from 49.1 in the previous month and surpassing the market consensus of 49.5.
• St. Louis Federal Reserve President Alberto Musalem stated on Friday, according to the Financial Times, that the Fed should begin cutting interest rates "gradually" following a larger-than-usual half-point reduction at the September meeting. Musalem acknowledged the possibility of the economy weakening more than anticipated, saying, "If that were the case, then a faster pace of rate reductions might be appropriate."
• On Friday, the US Core Personal Consumption Expenditures (PCE) Price Index for August, increased by 0.1% MoM, falling short of the expected 0.2% rise, aligning with the Federal Reserve's outlook that inflation is easing in the US economy. This has reinforced the possibility of an aggressive rate-cutting cycle by the Fed.
• During his China visit, Australian Treasurer Jim Chalmers had candid and productive discussions with the National Development and Reform Commission (NDRC). Chalmers highlighted China's economic slowdown as a key factor in weaker global growth while welcoming the country's new stimulus measures as a "really welcome development."
• China plans to inject over CNY 1 trillion in capital into its largest state banks, facing challenges such as shrinking margins, declining profits, and increasing bad loans. This substantial capital infusion would mark the first of its kind since the 2008 global financial crisis.
• According to the Reserve Bank of Australia's Financial Stability Review from September 2024, the Australian financial system remains resilient, with risks largely contained. However, notable concerns include stress in China's financial sector and the limited response from Beijing to address these issues. Domestically, a small but growing portion of Australian home borrowers are falling behind on their payments, though only about 2% of owner-occupier borrowers are at serious risk of default.

Technical Analysis: Australian Dollar holds position above 0.6900, lower boundary of an ascending channel

The AUD/USD pair trades near 0.6930 on Tuesday. A daily chart technical analysis shows that the pair is trending upwards within an ascending channel. The pair has held above the lower boundary of the channel, suggesting that the bullish bias remains intact. Moreover, the 14-day Relative Strength Index (RSI) is slightly below the 70 level, reinforcing the positive momentum.

In terms of resistance, the AUD/USD pair may aim for the area near the upper boundary of the ascending channel, around the 0.7020 level. A successful break above the ascending channel could indicate further bullish momentum. However, if the pair fails to breach this resistance, a pause within the channel is possible.

On the downside, the immediate support appears at the lower boundary of the ascending channel around the level of 0.6890, followed by the nine-day Exponential Moving Average (EMA) at the 0.6866 level. A break below this level could weaken the bullish bias and lead the AUD/USD pair to navigate the region around its six-week low of 0.6622.

AUD/USD: Daily Chart