Australian Dollar advances due to rising odds of an aggressive rate cut by the Fed

• The Australian Dollar appreciates due to a slight increase in the odds of a 50 basis points Fed rate cut.
• The Aussie Dollar receives support from the RBA's hawkish stance.
• The US Dollar faces challenges as the Treasury yields decline amid uncertainty over the scale of the Fed rate cut.

The Australian Dollar (AUD) inches higher against the US Dollar (USD) on Monday. The AUD/USD pair may appreciate further due to growing speculation that the US Federal Reserve will opt for a jumbo 50 basis points rate cut at this week's monetary policy meeting. Traders look forward to a slew of Australian jobs data due later this week to gauge the health of the labor market and the potential implications on domestic monetary policy.

The Reserve Bank of Australia (RBA) has maintained a hawkish stance, with RBA Governor Michele Bullock stating that it is premature to consider rate cuts due to persistently high inflation. RBA Assistant Governor Sarah Hunter also noted that while the labor market remains tight, wage growth appears to have peaked and is expected to slow further.

The US Dollar receives downward pressure as US Treasury yields depreciate amid uncertainty over the scale of the Fed rate cut. According to the CME FedWatch Tool, markets anticipate 48.0% odds of a 25 basis point (bps) rate cut by the Fed at its September meeting. The likelihood of a 50 bps rate cut has increased to 52.0%, up from 50.0% a day ago.

Daily Digest Market Movers: Australian Dollar appreciates amid uncertainty over Fed rate cut

• The University of Michigan's Consumer Sentiment Index rose to 69.0 in September, exceeding the market expectations of 68.0 reading and marking a four-month high. This increase reflects a gradual improvement in consumers' outlook on the US economy after months of declining economic expectations.
• China's Retail Sales grew by 2.1% year-on-year in August, slowing from 2.7% in the previous month and falling short of the market consensus of 2.5%. Given the close trade relationship between China and Australia, any shifts in China's economic performance could significantly impact the Australian market.
• China's economy weakened in August, with a continued slowdown in industrial activity and declining real estate prices, as Beijing faces growing pressure to increase spending to boost demand. This was reported by the National Bureau of Statistics on Saturday, according to Business Standard.
• The US Producer Price Index (PPI) rose to 0.2% month-on-month in August, exceeding the forecasted 0.1% increase and the previous 0.0%. Meanwhile, core PPI accelerated to 0.3% MoM, against the expected 0.2% rise and July's 0.2% contraction.
• The former Reserve Bank of Australia (RBA) Governor Bernie Fraser criticized the current RBA Board for being overly focused on inflation at the expense of the job market. Fraser suggested that the Board should lower the cash rate, warning of "recessionary risks" that could have severe consequences for employment.
• Australia's Consumer Inflation Expectations eased to 4.4% in September, down slightly from August's four-month high of 4.5%. This decline highlights the central bank's efforts to balance bringing inflation down within a reasonable timeframe and maintaining gains in the labor market.
• The US Consumer Price Index dipped to 2.5% year-on-year in August, from the previous reading of 2.9%. The index fell short of the expected 2.6% reading. The headline CPI stood at 0.2% MoM. Meanwhile, Core CPI ex Food & Energy, remained unchanged at 3.2% YoY. On a monthly basis, the index rose to 0.3% from the previous 0.2% reading.

Technical Analysis: Australian Dollar tests the upper boundary of the descending channel around 0.6700

The AUD/USD pair trades near 0.6700 on Monday. Technical analysis of the daily chart indicates that the pair is testing the upper boundary of a descending channel. A successful breach would signal a weakening bearish bias. Additionally, the 14-day Relative Strength Index (RSI) remains above the 50 level, suggesting a shift in momentum from a bearish to a bullish trend.

In terms of upside, a breakout above the upper boundary of the descending channel, near the 0.6700 level, could trigger a bullish bias for the AUD/USD pair. This could potentially push the pair toward its seven-month high of 0.6798 and test the psychological level of 0.6800.

On the downside, the AUD/USD pair could find immediate support around the nine-day Exponential Moving Average (EMA) at the 0.6703 level. A break below this level could reinforce the bearish bias and lead the pair to navigate the region around the lower boundary of the descending channel around the throwback support zone near 0.6575.

AUD/USD: Daily Chart