Australian Dollar weakens to near 0.7200 as traders await US PPI inflation data

The AUD/USD pair declines to near 0.7215 during the early Asian trading hours on Thursday. Markets turn cautious as traders brace for the release of the US inflation data later this week. Additionally, rising tensions in the Middle East could weigh on riskier currencies such as the Australian Dollar (AUD) against the US Dollar (USD). 

Traders raise their bets on an interest rate hike by the Federal Reserve (Fed) following the recent stronger US jobs data. The market is pricing in about 60% odds of an interest rate hike at the central bank’s policy ‌meeting next week, according to the CME FedWatch Tool.

Market participants will take more clues from the upcoming Producer Price Index (PPI) data due on Thursday and Consumer Price Index (CPI) data on Friday. These inflation reports could offer some hints about the monetary policy outlook of the Fed ahead of its meeting next week.

“A hot CPI print would all but seal a September hike and underpin a firmer dollar,” said Elias Haddad at Brown Brothers Harriman & Co. “A cooler reading would strengthen the case for a hold and leave the dollar vulnerable to a dovish Fed repricing.”

Hawkish signals from Reserve Bank of Australia (RBA) officials could provide some support to the Aussie. RBA Assistant Governor Sarah Hunter said on Tuesday that the central bank may need to raise interest rates again if inflation proves more persistent than expected, keeping alive the prospect of another hike at its September meeting.

RBA hawkish tilt aligns with US policy preferences

Analysts at Rabobank note that the Reserve Bank of Australia has turned more overtly hawkish after RBA official Hauser delivered what they describe as a “hawkish speech,” which has “markets thinking of hikes this month and in November.” They add that this shift is “very much what the US Treasury would like to see – plus a lot more action on non-housing parts of the economy,” underscoring how a more restrictive RBA stance, particularly beyond the housing sector, dovetails with US policy preferences and supports a firmer near-term outlook for the Aussie.

Technical Analysis: AUD/USD maintains a constructive outlook above the 100-day SMA

In the daily chart, AUD/USD holds above the 20-day simple moving average (SMA) and comfortably over the 100-day SMA, which together suggest a constructive near-term bias. Price is pressing the upper half of the Bollinger envelope, while the Relative Strength Index (RSI) at about 67 stays just below overbought territory, hinting that bullish momentum remains firm but may be nearing stretched conditions.

On the downside, initial support emerges at the Bollinger mid-line around 0.7165, with the lower Bollinger band and the 100-day SMA close to 0.7080forming a secondary demand area if a deeper pullback unfolds. On the topside, the immediate hurdle is the Bollinger upper band at approximately 0.7250; a sustained break above this barrier would open the door for an extension of the current advance, while failure here could see the pair ease back toward the aforementioned supports.