Australian Dollar edges lower as mixed Chinese PMIs fail to impress

• AUD/USD trades around 0.7160 on Monday, posting a modest decline on the day.
• Chinese manufacturing activity improves in August but remains in contraction territory.
• Australian inflation accelerates on an annual basis, supporting the central bank’s cautious stance.

AUD/USD trades around 0.7160 on Monday at the time of writing, down a modest 0.08% on the day. The Australian Dollar (AUD) struggles to find a clear direction following the release of mixed Chinese economic data, while investors also assess the latest indications on Australian inflation.

China’s National Bureau of Statistics (NBS) reported on Monday that the Manufacturing Purchasing Managers Index (PMI) improved to 49.8 in August from 49.2 previously, slightly above market expectations of 49.7. However, the index remains below the 50 threshold separating expansion from contraction, limiting the positive impact of the data on the Australian Dollar given the close trade ties between Australia and China.

Meanwhile, China’s Non-Manufacturing PMI remained unchanged at 49 in August. With both indicators remaining below the 50 threshold, the figures continue to signal fragile Chinese economic activity despite the improvement in the manufacturing sector.

On the domestic front, Australia’s TD-MI Inflation Gauge accelerated to 4.8% YoY in August from 4% in July. On a monthly basis, however, the indicator slowed to 0.5% after rising 1% in the previous month.

These persistent inflationary pressures support the cautious stance of the Reserve Bank of Australia (RBA). RBA Governor Michele Bullock recently stressed that an interest-rate cut was not under consideration and that further tightening remained possible if inflation failed to slow in line with forecasts. This outlook provides some support to the Australian Dollar and helps limit the decline in AUD/USD.

Investors now turn their attention to the release of Australia’s second-quarter Gross Domestic Product (GDP) data on Wednesday, which could provide fresh indications about the strength of the economy and influence expectations surrounding the RBA’s next monetary policy decision.

Fed credibility rebuilds as Warsh signals openness to further hikes

Analysts at Rabobank note that Fed Chair Kevin Warsh “appeared to rebuild some of his credibility as an inflation fighter” in his first speech at the annual Jackson Hole Symposium, stressing that the Federal Reserve still has “work to do” to return inflation to its 2% target. They argue that the message marked “an important shift from the communication strategy he had followed since taking office.”

More importantly, Rabobank highlights that, for the first time since becoming Chair, Warsh explicitly expressed dissatisfaction with recent inflation developments and signalled that he was open to further rate hikes unless underlying inflation began to improve convincingly. As he put it: “We must be convinced that underlying inflation is moving toward our target clearly and at a sufficient pace. Otherwise, we still have work to do.”

In response, Rabobank observes that “markets accordingly priced a greater probability of additional rate increases.” Yet longer-dated Treasury yields fell, suggesting that investors saw Warsh’s remarks as reducing policy uncertainty and reinforcing the Fed’s commitment to restore price stability. Put differently, the reaction combined “a slightly more hawkish near-term policy outlook with lower longer-term inflation and policy-risk premia.”

Rabobank judges that Warsh’s prepared remarks “seemed designed to lift rate-hike expectations, rebalance the September debate towards the hawks and rebuild his inflation-fighting credibility after July’s ‘all talk, no action’ criticism.” However, they caution that this creates “a difficult balancing act, as the White House may oppose a hike so close to November’s midterms.”

Even so, Rabobank concludes that Warsh delivered “an important signal: the Fed is not relying on tighter financial conditions alone and remains willing to tighten further if underlying inflation stalls.” Against that backdrop, they suggest that “the next round of data – especially the 4 September employment report and 11 September CPI – could therefore prove crucial for the Committee’s swing voters.”

AUD/USD technical analysis

In the one-hour chart, AUD/USD trades at 0.7160, keeping a bearish near-term tone as it holds below both the 200-hour and 100-hour simple moving averages (SMAs) at 0.7156 and 0.7176 respectively. The pair has slipped off the recent highs near 0.7200, and the Relative Strength Index (14) around 37 suggests fading bullish momentum, reinforcing the view that rallies are likely to be capped by overhead supply.

On the topside, immediate resistance is located at the 200-hour SMA at 0.7156, followed by the 100-hour SMA at 0.7176, while stronger selling interest is seen at 0.7190 and then 0.7207. On the downside, initial support emerges at the horizontal level of 0.7154, with a deeper floor at 0.7133, where buyers would need to defend to prevent a more pronounced bearish extension.

(The technical analysis of this story was written with the help of an AI tool. Know more.)