The AUD/USD pair is showing a corrective rise due to the overall weakening of the U.S. dollar. The pair's current growth is not driven by the Australian dollar itself, which lacks the strength to support the pair independently. Instead, the correction is entirely due to the U.S. dollar's behavior. This is precisely what makes the situation dangerous—once the market finishes pricing in the negative fundamental factors for the greenback, the Aussie won't be able to "carry the flag" on its own. Moreover, the upcoming August meeting of the Reserve Bank of Australia (RBA) may result in a 25-basis-point rate cut. In other words, despite what seems like confident growth, it is not recommended to open long positions on AUD/USD. Without additional supportive news, the upward momentum is likely to fade quickly, especially since the Australian dollar acts as an anchor for the pair, at best, slowing down price growth.
That said, the rise in the pair was also partly driven by a temporary strengthening of the Australian currency in reaction to fairly decent inflation data from the Melbourne Institute (MI Inflation Gauge). The indicator rose by 0.9% month-over-month in July (compared to a 0.1% rise the previous month) and by 2.4% year-over-year (unchanged from June).
This result allowed AUD/USD bulls to once again test the 0.65 area, which they've been challenging for a second consecutive trading day.
However, in my view, the MI Inflation Gauge is a weak ally for the Aussie. Its rise is attributed to seasonal factors—in other words, this is a short-term inflation spike. The broader trend remains downward, as indicated by the quarterly CPI data.
To recap, in Q2, Australia's consumer price index slowed to 2.1% year-over-year (from 2.4% in Q1), marking the slowest pace of growth since March 2021. On a quarterly basis, the figure also slowed to 0.7% from 0.8%. Core inflation dropped to 2.7% y/y, down from 2.9%. All components of the report came in below expectations.
In addition, early signs of labor market cooling have emerged in Australia. For example, the unemployment rate rose to 4.3%, its highest level since November 2021. Youth unemployment (ages 16–24) jumped to 10.4%, up from 9.5%. The number of employed people increased by just 2,000, while most analysts had forecast a much stronger gain (around 20,000). The employment structure is also troubling: full-time employment fell by nearly 40,000 in June, while part-time jobs increased by more than 40,000.
Although this is not yet a crisis or a sharp drop in employment, the June data matches the early phase of a labor market slowdown. Coupled with easing inflation, this gives the Reserve Bank of Australia a reason to lower the interest rate as early as the August meeting.
The minutes from last month's RBA meeting confirmed the central bank's dovish stance. Central bank members made it clear they are still on the path toward policy easing—the only point of discussion is the pace of rate cuts. Regarding the July pause, the board members stated it was necessary to "gain more clarity" on the cooling of inflation and the labor market.
Thus, the current fundamental backdrop suggests that sustained growth in AUD/USD is only possible if the U.S. dollar continues to weaken. On its own, the Aussie cannot push the pair higher based on its domestic fundamentals.
From a technical standpoint, the AUD/USD pair on the daily chart remains between the middle and lower lines of the Bollinger Bands indicator, within the Kumo cloud, and between the Tenkan-sen and Kijun-sen lines. Long positions should only be considered if the Aussie breaks above the resistance level of 0.6530 (middle Bollinger Band on the D1 chart). In that case, the price will move between the middle and upper Bollinger Bands, and the Ichimoku indicator will form a bullish "Parade of Lines" signal. The target for the upward move would be 0.6620—the upper Bollinger Band on the daily chart. Selling (for now) is not advisable given the continued weakness of the U.S. dollar.
