Australian Dollar rebounds from 0.7000 as US Dollar eases after strong week

AUD/USD edges higher on Friday, trading around 0.7025 at the time of writing, up 0.20% on the day. The Australian Dollar (AUD) benefits from a moderate correction in the US Dollar (USD), although the pair remains on track for a sharp weekly decline after approaching the psychological 0.7000 level earlier in the day.

The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, declines by 0.30% to 100.95 on Friday. The pullback comes after a strong week for the US currency, driven by rising US Treasury yields and increasing expectations that the Federal Reserve (Fed) will tighten monetary policy further.

Recent strong US business activity data, alongside persistent wage and energy price pressures, have reinforced expectations that interest rates may need to remain restrictive. Several Fed officials have also maintained a hawkish tone. New York Fed President John Williams said it is reasonable to expect another rate increase by the end of the year, while Philadelphia Fed President Anna Paulson suggested that modest additional increases might be necessary to bring inflation back toward the central bank's target.

Markets have consequently increased their bets on another Fed move, pushing US Treasury yields sharply higher and widening the monetary policy divergence with several other major economies.

Friday's US data offer little reason for investors to substantially reconsider that outlook. The University of Michigan Consumer Sentiment Index was revised higher to 48.1 in September from the preliminary estimate of 47.8, although it remains well below August's 51.7 reading. The Consumer Expectations Index is also revised up to 46.3 from 45.8 but declines sharply from 51.5 in the previous month.

Meanwhile, inflation expectations remain elevated. The University of Michigan's 1-year Consumer Inflation Expectations stayed unchanged at 4.6%, while the 5-year measure remained at 3.4%. Persistent inflation expectations could reinforce the Fed's cautious approach to monetary policy and limit the scope for a sustained US Dollar correction.

Meanwhile, the meeting between US President Donald Trump and Chinese President Xi Jinping provided limited support to the Australian Dollar despite conciliatory signals from both leaders. Xi described relations between Washington and Beijing as having reached a new historical milestone, while both sides signal their willingness to pursue cooperation and extend their bilateral trade truce.

However, the summit has so far produced few concrete breakthroughs on sensitive issues such as trade, artificial intelligence and Taiwan. Developments in China are particularly relevant for the Australian Dollar because China is Australia's largest trading partner, meaning an improvement in relations between Washington and Beijing can generally support sentiment toward the Aussie.

On the domestic front, expectations that the Reserve Bank of Australia (RBA) will raise interest rates next week provide some underlying support to the Australian currency. Australia's Unemployment Rate increased to 4.6% in August from 4.5% previously, but the modest deterioration in the labour market has not significantly altered expectations for the central bank's upcoming decision.

The combination of prospective RBA tightening and Friday's US Dollar correction helps AUD/USD regain some ground after rebounding near 0.7000. Nevertheless, the pair remains pressured on a weekly basis as higher US yields and increasingly hawkish Fed expectations continue to favour the Greenback.

AUD/USD technical analysis

In the one-hour chart, AUD/USD trades at 0.7027, keeping a bearish near-term tone as it holds below the 100-period simple moving average (SMA) at 0.7070 and the 200-period SMA at 0.7095. The pair is trying to stabilize after recent losses, with the Relative Strength Index (14) at 52.3 hinting at mildly improving momentum, yet price action remains capped by overhead moving average and horizontal resistance layers.

On the topside, initial resistance emerges at 0.7045, ahead of a thicker supply band formed by the 100-period SMA at 0.7070 and the nearby horizontal barrier at 0.7075, with further resistance at 0.7095 and 0.7105 before the more distant ceiling at 0.7140. On the downside, the first support is located at 0.7004, followed by a lower structural floor at 0.6984; a clear break beneath these levels would likely expose fresh selling pressure, while holding above them keeps scope for a corrective bounce within the broader bearish setup.

(The technical analysis of this story was written with the help of an AI tool. Know more.)