AUD/USD remains below 0.6500 mark after softer Chinese macro data, seems vulnerable

• AUD/USD oscillates in a narrow range just above the YTD trough touched on Monday.
• China's economic woes continue to weigh on the Aussie and cap the upside for the pair.
• Bets for one more Fed rate hike in 2023 underpin the USD and favour bearish traders.

The AUD/USD pair struggles to capitalize on the previous day's modest bounce from the vicinity of mid-0.6400s, or its lowest level since November 2022 and edges lower during the Asian session on Tuesday. Spot prices currently trade around the 0.6485 region, nearly unchanged for the day, and seem vulnerable to prolonging the recent downward trajectory witnessed over the past month or so.

Despite surprise rate cuts by the People's Bank of China (PBoC), growing concerns about the worsening economic outlook in China continues to undermine the Australian Dollar (AUD). In fact, the PBoC lowered its benchmark rate – Medium-term Lending Facility (MLF) – to 2.5% from 2.65% and the reverse repo rate to 1.8% from 1.9%. This, however, was overshadowed by the disappointing Chinese macro data released today, which showed that Retail Sales and Industrial Production grew less than anticipated in July.

Meanwhile, minutes of the Reserve Bank of Australia's August 2023 policy meeting revealed that the default position now is to hold interest rates steady. Policymakers agreed that some further tightening might be needed, though saw a "credible path" back to the inflation target with the current cash rates at 4.1%. This, along with softer-than-expected Aussie wage data, which grew 0.8% in Q2, contributes to capping the upside for the AUD/USD pair amid the underlying bullish tone surrounding the US Dollar (USD).

The US CPI and the PPI report released last week indicated that the battle to bring inflation back to the Fed's 2% target is far from being won. This should allow the Federal Reserve (Fed) to stick to its hawkish stance and keep interest rates higher for longer, which remains supportive of elevated US Treasury bond yields and continues to underpin the Greenback. This further contributes to capping the AUD/USD pair and suggests that the path of least resistance for spot prices remains to the downside.

Market participants now look to the US economic docket, highlighting the release of monthly Retail Sales and the Empire State Manufacturing Index later during the early North American session. This, along with the US bond yields and the broader risk sentiment, will influence the USD price dynamics and provide some meaningful impetus to the AUD/USD pair. The aforementioned fundamental backdrop, meanwhile, seems tilted firmly in favour of bearish traders and supports prospects for further losses.

Technical levels to watch