Australian Dollar declines after PMI data shows business activity cooled to a six-month low

• The Australian Dollar continues to lose ground following the release of mixed PMI data on Wednesday.
• Australia’s Composite PMI declined to 50.2 in July from 50.7 in June, marking the slowest growth in six months.
• The US Dollar may be under pressure due to rising bets on a Fed rate cut in September.

The Australian Dollar (AUD) continues its losing streak for the eighth consecutive day following the release of mixed data from Australia’s Judo Bank Purchasing Managers Index (PMI) on Wednesday. Moreover, sluggish economic activity in China has put additional selling pressure on the AUD. Concerns about the weak Chinese economy were heightened by an unexpected rate cut from the People’s Bank of China (PBoC) on Monday.

Additionally, the weak outlook for the Chinese economy has caused a decline in iron ore prices, further pressuring the Australian Dollar. Iron ore prices depreciate toward $108.00, hitting its lowest level in three weeks. This decline is particularly impactful for Australia, the largest exporter of this precious metal.

The US Dollar (USD) may struggle due to rising bets on a Federal Reserve (Fed) rate cut in September, which could limit the downside of the AUD/USD pair. Traders await the data release of the Global Purchasing Managers Index (PMI) on Wednesday to gain fresh insights into the economic conditions of the United States (US).

According to CME Group’s FedWatch Tool, markets now indicate a 93.6% probability of a 25-basis point rate cut at the September Fed meeting, up from 88.5% a day earlier.

Daily Digest Market Movers: Australian Dollar depreciates due to China’s growing concerns

• Australia’s Judo Bank Manufacturing PMI improved to 47.4 in July from 47.2 in June. Meanwhile, the Services PMI dropped to 50.8 in July from 51.2 in June. The Composite PMI also declined, falling to 50.2 in July from 50.7 in June.
• Media reports say that Vice President Kamala Harris has just passed 1,976 Democratic delegates to secure the party’s presidential nomination. Harris is now the Democratic Party’s Presumptive Nominee for November’s Presidential Election.
• “The interest rate cuts by the People’s Bank of China (PBoC) and the outcomes of the Third Plenum are too modest to convince market participants that a significant acceleration in the Chinese economy is in prospect,” said Joseph Capurso, head of international economics at the Commonwealth Bank of Australia.
• The People’s Bank of China (PBoC) has cut one- and five-year loan prime rates by ten basis points to 3.35% and 3.85%, respectively. Any change in the Chinese economy could impact the Australian markets as both countries are close trade partners.
• Federal Reserve Bank of New York President John Williams stated on Friday that the long-term trends that caused declines in neutral interest rates before the pandemic continue to prevail. Williams noted, “My own Holston-Laubach-Williams estimates for r-star in the United States, Canada, and the Euro area are about the same level as they were before the pandemic,” according to Bloomberg.
• Reuters cited Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia, saying, “The current pace of employment growth suggests demand is resilient and cost pressures will remain. We think the RBA will stay the course and keep rates on hold, but August is certainly a live meeting.”
• Fed Chair Powell stated last week that the three US inflation readings from this year “add somewhat to confidence” that inflation is on track to meet the Fed’s target sustainably, suggesting that a shift to interest rate cuts may be imminent.

Technical Analysis: Australian Dollar falls to near 0.6600

The Australian Dollar trades around 0.6610 on Wednesday. The daily chart analysis shows that the AUD/USD pair is depreciating within a descending channel, indicating a bearish bias. The 14-day Relative Strength Index (RSI) is below the level of 50, confirming a bearish trend.

The AUD/USD pair tests the lower boundary of the descending channel near the psychological level of 0.6600. A decline below this level could push the pair toward the throwback support around 0.6590.

On the upside, key resistance is at the nine-day Exponential Moving Average (EMA) at 0.6671, followed by the psychological level of 0.6700. A breakthrough above this level could lead the AUD/USD pair to test the upper boundary of the descending channel around 0.6722, and then aim for a six-month high of 0.6798.

AUD/USD: Daily Chart