Australian Dollar gains traction to near 0.7100 on fading Fed hike bets

On Monday, the Australian Dollar (AUD) demonstrated resilience, trading near 0.7090 during the initial hours of the Asian session. The US Dollar (USD) weakened against the Australian Dollar (AUD) due to diminished expectations of a Federal Reserve (Fed) rate hike, influenced by subpar US economic indicators. Traders are awaiting China's forthcoming Retail Sales and Industrial Production data, released later on the same day.

Earlier this week, the US Census Bureau disclosed a decline in US Retail Sales by 0.6% MoM in July, down from a rise of 0.2% in June. This figure fell short of market projections of a 0.1% increase. Annually, Retail Sales reached 5.0% in July, revised from 6.7%. This announcement has diminished expectations of a September Fed rate hike, with odds dropping from approximately 50% to 33.1% this week, as per the CME FedWatch tool.

Assistant Governor Christopher Kent of the Reserve Bank of Australia (RBA) stated last week that it would take some time for tighter monetary policy to manifest its full impact on economic activity and inflation, but early indications suggest the policy is functioning as intended. Reports indicated that Israel had resumed airstrikes against Lebanon in recent days, following a reduction in attacks earlier in the month.

Analysts at Societe Generale noted that the RBA's recent communication maintained a strongly hawkish tone, emphasizing the bank's readiness to act if necessary to curb inflation. In daily charts, AUD/USD exhibits a bullish near-term outlook, with the spot price trading above the 100-day simple moving average (SMA) and the Bollinger middle band, indicating underlying demand during shallow pullbacks.

The currency faces resistance near 0.7105, with a potential for continued advancement if it closes above this level. Conversely, support is expected at the 100-day SMA near 0.7060, followed by the Bollinger middle band at 0.7026 and the lower band at 0.6945, where a more pronounced correction might occur. Factors influencing the Australian Dollar include the Reserve Bank of Australia's interest rate decisions, Australia's resource-rich status, China's economic performance as its largest trading partner, and inflation rates within Australia.

Market sentiment, whether investors are more inclined towards riskier assets (risk-on) or seeking safe havens (risk-off), also plays a crucial role, with risk-on scenarios generally benefiting the AUD.