The Australian dollar (AUD) continued its upward momentum against the U.S. dollar (USD) on Monday, breaking through key technical resistance to reach a six-month high of 0.6537. The bullish performance in AUD/USD comes amid a broadly weaker U.S. dollar, weighed down by growing concerns over the U.S. fiscal deficit and debt sustainability.
U.S. Dollar Under Pressure from Fiscal Concerns
Persistent uncertainty surrounding the U.S. fiscal outlook has undermined the greenback in recent sessions. Investors remain cautious about rising budget deficits, which could prompt a deterioration in sovereign credit ratings or force a recalibration of interest rate expectations. This backdrop has been favorable for high-beta currencies like the Australian dollar.
Additionally, markets are increasingly pricing in Federal Reserve interest rate cuts in the coming months, which has accelerated the USD’s retreat and bolstered AUD strength.
RBA’s Dovish Outlook Could Limit AUD Upside
Despite the recent rally, the upside potential for the Australian dollar may be tempered by dovish signals from the Reserve Bank of Australia (RBA). Last week, the RBA cut interest rates by 25 basis points, and Governor Michele Bullock emphasized that the central bank stands ready to ease policy further if the economic outlook deteriorates significantly.
This cautious stance has kept market participants from aggressively bidding the AUD higher, particularly given the uncertain trajectory of Australia’s domestic economy and inflation outlook.
China Relations in Focus
External factors remain critical for the AUD’s trajectory. Renewed optimism over the 90-day trade truce between China and the United States has helped lift sentiment toward risk-sensitive currencies. With China serving as Australia’s largest trading partner, progress on global trade negotiations is particularly supportive of the Australian dollar.
However, geopolitical risks persist. The Chinese Embassy has criticized Australia’s potential move to cancel the 99-year lease of Darwin Port to China’s Landbridge Group. The port deal, signed in 2015, has become a flashpoint in Australia-China relations. The Chinese Ambassador called the proposal to revoke the lease “unfair and immoral,” raising concerns of diplomatic tension that could eventually spill into trade or investment dynamics.
Technical Analysis: Bullish Breakout Signals Momentum
From a technical standpoint, AUD/USD remains in an uptrend:
The pair traded around 0.6530 on Monday, holding above the 9-day exponential moving average (EMA), currently at 0.6456.
The 14-day Relative Strength Index (RSI) is approaching the 70 level, signaling strengthening bullish momentum but also nearing overbought conditions.
A breakout above the December 2, 2024 high of 0.6515 confirms the bullish breakout, setting the stage for a potential move toward the seven-month high of 0.6687, last seen in November 2024.
Support levels to watch include:
Immediate support at the 9-day EMA near 0.6456.
Deeper support at the 50-day EMA around 0.6378.
A break below these levels could signal waning bullish momentum and open the path for a corrective move toward the 0.5914 region — a multi-year low from March 2020.
Bullish Trend Faces Policy and Geopolitical Headwinds
The Australian dollar’s strong start to the week reflects a confluence of favorable global macroeconomic conditions, including a weaker U.S. dollar and renewed optimism on international trade. However, a dovish RBA and delicate Australia-China relations may cap further gains unless global risk sentiment continues to improve significantly.
Traders should monitor developments in U.S. fiscal policy, Chinese-Australian diplomatic ties, and upcoming Australian data releases for cues on whether the current rally can extend beyond recent highs.
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