AUD/USD dips amid US dollar recovery and RBA's dovish tone

During the latest trading session, the AUD/USD pair experienced a significant decline, dropping to 0.6560. A combination of factors drove this downturn. The sudden rise in the US dollar's strength, combined with the Australian dollar's susceptibility, notably affected by the Reserve Bank of Australia's (RBA) less aggressive stance on interest rates after opting to keep rates steady at 4.35%, has put considerable pressure on the Australian currency.

Reasons for the currency fluctuations

RBA Governor Michele Bullock did not express a strong commitment to raising interest rates again, which raised doubts about further rate hikes and added to the downside pressure. In her press briefing, she adopted a measured stance. Regarding interest rates, she hinted at the board's deliberations, suggesting the possibility of rate increases with phrases like "we might have to raise, we might not."

Meanwhile, in his remarks on Tuesday, Neel Kashkari, the President of the Minneapolis Fed, expressed his belief that interest rates will probably need to remain at their current levels for a prolonged period.

"I think it's much more likely we would just sit here for longer than we expect or the public expects right now until we see what effect our monetary policy is having," he stated.

The US Dollar Index (DXY) climbed to 105.50 following remarks from Neel Kashkari, who expressed the importance of observing consecutive favourable inflation figures to ensure a steady decline towards the 2% target. Additionally, he suggested that a sluggish job market might warrant considering a rate reduction.

Without significant economic data releases from the United States, investors will concentrate on remarks from Vice Chair Philip Jefferson of the Federal Reserve, President Susan Collins of the Boston Fed, and Governor Lisa Cook of the Federal Reserve. These addresses are expected to play a pivotal role in shaping market sentiment and influencing projections regarding the future movements of the USD.

AUD/USD key resistances and supports

The selling impetus in AUD/USD appears to have met some resistance near the 55-SMA around 0.6560, but further downside targets include the 200-day SMA at 0.6522 and the 100-SMA at 0.6508. On the upside, initial resistance lies at 0.6647, closely followed by 0.6667.

This implies that based on past price actions, these levels indicate potential areas where traders could initiate buy or sell orders, potentially leading to a reversal of the prevailing trend. Should the pair decline, it may find support around 0.6522 or 0.6508, whereas an upward movement could encounter resistance around 0.6647 or 0.6667.

RBA's inflation expectations

In its recent declaration, the RBA maintained a non-committal stand on monetary policy and forecasted an increase in inflation, peaking in the second quarter of 2025, mainly due to persisting price hikes for services.

We believe we have rates at the right level to return inflation to the target range

Michele Bullock

The RBA updated its macroeconomic projections, foreseeing an increase in both headline and trimmed mean inflation rates until the second quarter of next year. This uptick is largely attributed to persistent inflation in service prices. However, the bank expects inflation to revert to the 2%–3% target range in the latter part of 2025 and to approach the midpoint by 2026.

AUD/USD short-term projection

Potential gains might propel the AUD/USD towards retesting its peak in May at 0.6647 (May 3), preceding the March high of 0.6667 (March 8) and the December 2023 peak of 0.6871.

Conversely, if selling pressure resurfaces, the spot rate could challenge the pivotal 200-day SMA at 0.6519 before revisiting the May low of 0.6465 and the 2024 nadir of 0.6362 (April 19). From a broader perspective, prospects for further upward momentum remain promising as long as the crucial 200-day SMA holds.