- The US dollar is on the defensive on inflation concerns.
- FED chair hints at tapering to curb inflation.
- AUD strengthens amid improving COVID situation.
- Easing Evergrande concerns fuels AUD strength.
The US dollar remains on the defensive at the start of the week as traders continue to weigh the prospect of runaway inflation hastening interest rate increases outside the US. The greenback has since dipped to a one-month low, weakening across the board on the Federal Reserve Chairman Jerome Powell reiterating that it is not yet the time it begins raising interest rates.
The remarks by Powell come on traders pricing the prospects of the FED hiking interest rates starting the second half of next year. However, with the central bank yet to begin trimming long dollar positions has all but continued to fuel dollar weakness.
AUDUSD technical analysis
Consequently, the AUDUSD has been one of the biggest beneficiaries of the FED, going slow on asset tapering and pushing back on interest rate hikes. The pair gained 0.99% last week as the AUD continued to gain ground against the USD.
Likewise, AUDUSD has started the week on the front foot gaining more than 0.2%, having found support above the 0.7450 level. Given the strength of the upward momentum, all indication is that the pair could make a run for the 0.7500 level, given that the RSI is not overbought.
The 0.7550 is the immediate resistance level that the pair will have to bypass to continue edging higher. On the flip side, a daily closing below the 0.7455 could trigger renewed sell-off that could see the pair plunging back to the 0.7397 level.
AUD strengthening against USD
The Australian dollar has been on the front foot in recent days amid the easing of COVID-19 restrictions in Australia. Reports that the country intends to roll out COVID-19 booster shots have made AUDUSD buyers hopeful as the dollar remains defensive.
Additionally, the rally on the AUDUSD has been supported by the easing of the Evergrande story in China. The cool-off has underpinned AUD demand. There were concerns that the property group going under would have serious ripple effects, with Australia one of the biggest casualties as it is one of China’s biggest trading partners.
The FED factor
Meanwhile, the gains on the AUDUSD pair remain capped on FED chairman Jerome Powell reiterating they are more than ready to use the necessary tools should high inflation persist. While high inflation is likely to last well into next year, the FED expects it to move back down toward the 2% target.
Should inflation fail to tank, the FED may be forced to accelerate the rollback of the bond purchase program as well as pursue interest rate hikes. Such a move will favor the dollar sentiments that continue to curtail AUD gains against the greenback.
Bottom line
However, as it stands, AUDUSD looks set to continue gaining ground against the greenback as treasury yields continue to edge lower, fuelling USD weakness. Improving economic outlook in Australia with the easing of COVID-19 restrictions and the Evergrande situation being brought under control should continue to offer support to the AUD, consequently fueling further price gains on the AUDUSD.
