AUD/USD rallies to fresh four-month highs on risk-on mood, awaits FOMC’s decision

• AUD/USD climbs for five consecutive days, buoyed by a surprise rate hike from the Reserve Bank of Australia (RBA) and a weakening US Dollar (USD)
• The May US Producer Price Index (PPI) came in lower than expected, adding further pressure to the USD.
• Federal Reserve’s upcoming monetary policy announcement and economic projections may weaken USD further if they lean dovish.

AUD/USD has climbed for five days, underpinned by the latest Reserve Bank of Australia (RBA) hike surprise and leaning toward a soft US Dollar (USD). That, alongside a risk-on impulse ahead of a possible Federal Reserve (Fed) pause, maintains the Aussie (AUD) rally. The AUD/USD exchanges hands at 0.6829, at new four-month highs, after dropping to a low of 0.6762.

AUD/USD continues its rally to new four-month highs amid a softer US Dollar and risk-on market sentiment

A risk-on impulse is seen, with Wall Street registering gains. The Federal Reserve is expected to deliver a hawkish hold after measures of inflation showed signs of cooling but remained at levels twice the size of the Fed’s target.

The US Department of Labor revealed the Producer Price Index (PPI) for May came at 1.1% YoY below estimates, while the core reading rose by 2.8% YoY, lower than the 2.9% forecast. Although prices continued to be downtrend, core inflation remains stubbornly stickier than expected if we consider Tuesday’s core CPI above 5%.

The AUD/USD soared after the data release, breaking the 0.6800 figure and printing multi-month highs at around 0.6830s, while the greenback tumbled. The US Dollar Index (DXY), which measures the buck’s value vs. a basket of peers, falls 0.60%, at 102.688, its lowest level in four weeks.

In addition to revealing its monetary policy, the Fed will update economic projections and the dot plot. Analysts would scrutinize the reports looking for clues that the Fed is pausing its tightening cycle. Dovish surprises could be catastrophic for the buck and propel the AUD/USD toward the 0.69 handle.

On the Australian front, job data is eyed by AUD/USD traders. After a dismal report in April, the labor market is expected to remain solid, with the Aussie economy slashing 27,100 full-time jobs. A robust employment report would keep the RBA from easing policy until it remains confident the labor market is cooling down.

AUD/USD Price Analysis: Technical outlook

After cracking the 0.68 handle and the May 10 daily high of 0.6818, the AUD/USD distanced from the 200-day Exponential Moving Average (EMA), cementing its uptrend. But, Fed’s decision could rock the boat, and the five-day rally would put at risk buyers’ early gains. If the pair breaks below the 0.6800 figure, the AUD/USD could dip toward the 200-day EMA at 0.6755, but firstly must surpass the March 1 high at 0.6753. If those levels are broken, the AUD/USD subsequent sliding would be toward 0.6700. Conversely, the AUD/USD would extend its uptrend if it reclaims 0.6900, followed by the February 21 high at 0.6919.