AUD/USD holds steady above 0.6500 mark, seems vulnerable near two-month low

The AUD/USD pair struggles for a firm intraday direction on Friday and seesaws between tepid gains/minor losses, just above the 0.6500 psychological mark through the Asian session. Spot prices, meanwhile, remain well within the striking distance of the lowest level since early June touched earlier this week and seem vulnerable to prolonging the recent downward trajectory witnessed over the past four weeks or so.

The US Dollar (USD) manages to preserve the previous day's solid recovery gains from over a one-week low – touched in the aftermath of softer US consumer inflation figures – and turns out to be a key factor acting as a headwind for the AUD/USD pair. The US Bureau of Labor Statistics (BLS) reported on Thursday that the headline CPI rose from 3% to 3.2% YoY rate in July, less than consensus estimates, while the Core CPI inflation (excluding volatile food and energy prices) edged lower to 4.7% from 4.8% in June. The inflation, however, remains way above the Federal Reserve's 2% target and keeps hopes for one more 25 bps lift-of by the end of this year, which, in turn, is seen lending some support to the Greenback.

The downside for the AUD/USD pair, meanwhile, remains cushioned in the wake of hawkish remarks by the Reserve Bank of Australia (RBA) Governor Philip Lowe. Speaking before the House of Representatives Standing Committee on Economics, Lowe reiterated that it is possible that some further tightening of monetary policy will be required to ensure that inflation returns to target within a reasonable timeframe. This, along with hopes for additional stimulus measures from China, helps limit the downside for the China-proxy Australian Dollar (AUD), at least for the time being. That said, concerns about the worsening economic conditions in China should hold back traders from placing aggressive bullish bets.

The incoming Chinese macro data pointed to weakening domestic demand and faltering post-COVID recovery in the world's second-largest economy. The fears were fueled by Chinese inflation figures released on Wednesday, which showed that consumer prices declined for the first time since February 2021 and the Producer Price Index (PPI) fell for the 10th consecutive month in July. This comes on the back of rather disappointing trade data on Tuesday, which might continue to keep a lid on any meaningful upside for the China-proxy Aussie, at least for the time being.

Market participants now look to the US economic docket, featuring the release of the PPI, along with the Preliminary Michigan Consumer Sentiment and Inflation Expectations, due later during the early North American session. Apart from this, the broader risk sentiment will influence demand for the safe-haven buck and produce short-term trading opportunities around the AUD/USD pair on the last day of the week. Nevertheless, spot prices remain on track to end in the negative territory for the fourth straight week, ahead of the RBA minutes and Chinese data dump on Monday.

Technical levels to watch