AUD/USD bulls approach 0.6900 amid China-inspired optimism, focus on RBA Minutes, Fed Powell’s Testimony

• AUD/USD picks up bids to reverse the previous day’s pullback from four-month high.
• US-China talks, Beijing’s likely stimulus underpin risk-on mood.
• RBA versus Fed divergence contrasts with mixed US data to favor Aussie bulls.
• Juneteenth US holiday restricts Monday’s AUD/USD moves ahead of a likely busy week.

AUD/USD begins the trading week on a firmer footing, picking up bid to around 0.6885 by the press time, as weekend news surrounding China joins receding hawkish hopes from the Fed to favor the Aussie pair buyers. However, the previously mixed US data and a Juneteenth US holiday limit the quote’s immediate moves ahead of an important week comprising the Reserve Bank of Australia (RBA) Monetary Policy Meeting Minutes and Fed Chair Jerome Powell’s Semi-Annual Testimony, not to forget the preliminary readings of the US and Australia Purchasing Manager Indexes (PMIs) for June.

During the last week, the US Dollar Index (DXY) failed to cheer the US Federal Reserve’s (Fed) hawkish pause to the rate hike trajectory as mostly downbeat data challenged hopes of the US central bank’s rate hike past July. Additionally, comparatively more hawkish moves of the European Central Bank (ECB) weighed on the US Dollar.

On the other hand, strong Australian inflation numbers and hopes of witnessing more stimulus from China added strength to the AUD/USD upside. Furthermore, the weekend news suggesting the improvement in the US-China ties and expectations of more stimulus from Australia’s biggest customer, namely China, allow the Aussie pair buyers to remain hopeful.

That said, the preliminary readings of the University of Michigan (UoM) Consumer Sentiment Index (CSI) for June improved to 63.9 from 59.2 prior and market expectations of 60.0. However, the year-ahead inflation expectations receded for the second consecutive month to the lowest since March 2021, falling to 3.3% in June from 4.2% in May, per the UoM report, while the five-year forecasts appear little changed to 3.0% versus 3.1% anticipated and prior. Previously, US Retail Sales and inflation data weren’t too impressive, which in turn flagged fears of the US economic performance and weighed on the US Dollar.

On the other hand, US Secretary of State Antony Blinken and Chinese Foreign Minister Qin Gang on Sunday held what both called candid and constructive talks on their differences from Taiwan to trade but seemed to agree on little beyond keeping the conversation going with an eventual meeting in Washington, reported Reuters. Further, news from the South China Morning Post (SCMP) quoting China State Council also flashes positive signals for the sentiment as it said, “The Council considered a batch of macroeconomic policies designed to expand ‘effective demand’, strengthen the real economy and defuse risks in key areas.”

Alternatively, Fed policymakers have been hawkish of late and challenged the AUD/USD bulls. “Inflation in the US is well above target and the labor market remains very tight,” as per the latest US Federal Reserve (Fed) Monetary Policy Report to the US Congress, published Friday. The report also mentioned, per Reuters, “Outlook for funds rate is subject to considerable uncertainty.” On the same line, “Raising rates further could create the risk of a more significant slowdown in the economy,” signaled Thomas Barkin, President of the Federal Reserve Bank of Richmond on Friday, per Reuters. The policymaker, however, also added that the Fed can do comfortable more to slow the resilient US economy, which in turn triggered a jump in the 2-year Treasury bond yields to 4.75% and helped the US Dollar to get off the lows.

Furthermore, “US economy is still ‘ripping along’,” said Federal Reserve Governor Christopher Waller on Friday while adding that everything seems to be calm in the US banking system, as reported by Reuters.

Against this backdrop, Wall Street closed positive and helped S&P500 Futures to print mild gains by the press time. Further, the US Treasury bond yields recovered on Friday but lacks upside momentum, which in turn probed the US Dollar price and put a floor under the AUD/USD price.

Moving on, a light calendar may allow the AUD/USD pair to grind higher but the risk-positive news may keep buyers hopeful as markets await RBA Minutes and Fed Chairman Powell’s testimony, as well as PMIs for June.

Technical analysis

The overbought RSI (14) line joins the 61.8% Fibonacci retracement of February-May downside, around 0.6895, quickly followed by the 0.6900 round figure, to challenge the AUD/USD bulls. The bears, however, have limited downside room to cheer as a two-week-old ascending support line, close to 0.6835 by the press time, restricts short-term declines of the pair.