AUD/USD retreats as traders eye Powell and US-China trade talks

• AUD/USD consolidates below 0.6515 resistance ahead of key events
• Federal Reserve is expected to hold rates; focus on Powell's guidance
• China announces monetary easing measures ahead of US trade talks

The Australian Dollar (AUD) is trading lower on Wednesday after failing to break above a key resistance level, with markets turning cautious ahead of expected commentary from United States (US) Federal Reserve (Fed) Chair Jerome Powell and high-level trade talks between the US and China. 

At the time of writing, the AUD/USD pair is trading at 0.6467, pulling back from the five-month high of 0.6515, just below the December 2024 peak of 0.65156.

This mild retreat reflects consolidation rather than reversal, as traders await clarity on monetary policy, global risk sentiment, and the near-term demand outlook tied to China. 

The next directional move in AUD/USD will likely hinge on three critical themes: the Federal Reserve's policy guidance, the tone and outcome of the upcoming US-China talks, and China's latest round of economic stimulus.

Policy direction from the Federal Reserve remains the top risk

With the Federal Reserve meeting scheduled for Wednesday at 18:00 GMT, markets expect interest rates to remain unchanged.

The focus is not on immediate action but on when monetary easing will begin, with a 25 basis point cut currently priced in for July. Traders are particularly interested in whether comments from Chair Jerome Powell alter the current outlook or reinforce expectations for a mid-year pivot.

While policy rates are likely to stay on hold, any shift in tone could have significant implications for the US Dollar (USD). A dovish message would support the case for July easing and could benefit risk-sensitive currencies like the Australian Dollar. Conversely, a more cautious or data-dependent stance could strengthen the US Dollar and pressure AUD/USD lower.

Trade negotiations could shape sentiment around China

Although monetary policy dominates near-term positioning, geopolitics is also in play.

On Tuesday, US Secretary of the Treasury Scott Bessent stated that trade talks between senior US and Chinese officials are expected to begin on Friday in Switzerland. While formal confirmation remains pending, markets are sensitive to any signal of progress or breakdown.

For the Australian Dollar, the stakes are high. As a major exporter of iron ore, coal, and other commodities to China, Australia's economic outlook is tightly linked to Chinese demand. Any easing of trade tensions between Washington and Beijing could lift expectations for Chinese growth and indirectly support the AUD. Conversely, if talks stall or rhetoric hardens, risk appetite may fade, capping further upside in the pair.

Australian fundamentals are stable but overshadowed by external risks

Meanwhile, Australia's political and economic backdrop remains steady. On Saturday, the federal election delivered a clear victory for Prime Minister Anthony Albanese's Labor Party, removing political uncertainty and reinforcing expectations for policy continuity. While the result has had little direct impact on currency markets, it supports a stable investment climate.

Economically, inflation in Australia remains above the Reserve Bank of Australia's (RBA) target range but is gradually easing. The labour market is still tight, though recent data suggests moderation in hiring momentum. The RBA is expected to hold rates steady in the near term while monitoring inflation and wage growth. Domestically, these conditions are broadly neutral for the AUD, leaving external drivers -- particularly the Federal Reserve and China -- as the key influencers.

Stimulus measures in China offer indirect support for AUD

China's macroeconomic policy also continues to shape expectations for the Australian Dollar. On Wednesday, Chinese authorities cut the benchmark interest rate by 10 basis points to 1.4% and lowered the Reserve Requirement Ratio by 50 basis points, injecting approximately 1 trillion yuan (USD 138 billion) into the banking system. The measures aim to stabilise domestic demand and support growth amid ongoing headwinds.

For Australia, stronger Chinese demand typically boosts exports and commodity prices, lending indirect support to the AUD. While the immediate market reaction was measured, investors will now look for confirmation through data, particularly in trade, manufacturing, and credit, to determine whether the stimulus is gaining traction.

Technical overview: Key resistance holds amid fading momentum

From a technical perspective, AUD/USD remains within a bullish structure but has failed to clear a major resistance zone near 0.6515, a level aligned with the December high at 0.65156.

The pair has since pulled back modestly and is now consolidating just below the 200-day Simple Moving Average (SMA), which currently sits at 0.6461 and continues to act as dynamic resistance.

Momentum indicators remain constructive, with the Relative Strength Index (RSI) on the daily chart at 60.12, above the neutral 50 level, suggesting that buyers have not exited, but conviction has weakened in the absence of a new catalyst.

Two major Fibonacci retracement levels help frame near-term trading conditions. The short-term retracement, drawn from the September 2024 high of 0.6943 to the April low of 0.5868, places the 38.2% level at 0.6549 -- now acting as initial upside resistance -- while the 50.0% and 61.8% levels come in at 0.6428 and 0.6307, respectively, providing layered support.

On a broader scale, the long-term Fibonacci retracement, taken from the March 2020 low of 0.5507 to the February 2021 high of 0.8007, places the 23.6% retracement at 0.6699 and the 50.0% level at 0.6758 -- targets that would only come into view on a decisive breakout beyond the current range.

AUD/USD daily chart

A daily close above the 0.6515-0.65156 resistance area would confirm a breakout and could open the path toward 0.6549, corresponding to the 38.2% retracement of the September-April decline. A stronger rally could then extend toward 0.6699 and 0.6758, both part of the long-term retracement range. A dovish message from Jerome Powell, progress in trade negotiations, or stronger-than-expected Chinese data could trigger this scenario.

Failure to hold above the 200-day SMA at 0.6461 and the 50.0% short-term retracement at 0.6428 would shift the bias lower. 

In that case, support at 0.6380, a former range high, becomes vulnerable, with 0.6307 (61.8% short-term retracement) the next key level. A hawkish tilt from the Federal Reserve, trade friction, or weak Chinese indicators could accelerate downside momentum.