The Aussie Dollar shed 1.08% over the past week to trade at 0.689 as geopolitical tensions flared up and US economic data positively surprised market participants. Being a risk-on currency, the Australian Dollar dropped sharply on Tuesday after US House Speaker Nancy Pelosi further strained US-China relations by visiting Taiwan. Moreover, the US ISM non-manufacturing PMI improved to 56.7 in July from 55.3 in July, significantly above market expectations of a fourth-straight decline in the non-manufacturing PMI to 54. Consistently strong US economic data may force policymakers to impose higher rate hikes to cool the economy, increasing the interest rate differential between the US and Australia, which leads to further downward pressure on the Australian Dollar.
The Euro slumped 0.74% over the past week to trade slightly above parity at 1.018 on the back of strong US economic data. The July employment report showed that the jobs market was returning to pre-pandemic levels as the US economy added 528,000 jobs, far above market expectations. As such, markets have currently priced in a 68% chance that the FOMC will hike the Fed Funds Rate by 75 basis points in September as the US grapples with inflation levels not seen since 1981. The outlook for the Euro is poor as the interest rate differential continues to widen, with the ECB only starting to tighten its monetary policy.
The AUD has maintained its strong upwards momentum in the past week, breaking through the mid range resistance at 0.705 and consolidating at around 0.712 USD. From here the AUD could likely see higher, as it follows the trend of other risk-on assets such as the NASDAQ, which has been making a strong bullish move. In this scenario we would likely see a move to the top of the range at the resistance level of 0.726, where price would either stabilize or reject based on fundamental influences. If the AUD reverses its current trajectory, which would only be catalysed by a change in monetary policy by either the Federal Reserve or RBA, then the support levels of 0.705 and 0.687 would likely come into play.
The EUR continues its abysmal performance against the USD, with tensions in Europe remaining heightened as well as the lack of action from the ECB causing EUR/USD to continue to make lower lows. Despite this, the Euro has gone on a slight uptrend in the past week against the USD, after rejecting the major support at 1.00145. However with two major resistance levels of 1.03755 and 1.07632 above, there is likely not much chance the Euro can continue higher in the current economic climate. It is likely that the poor market structure at 1.025 which has formed over the past week will be retested in the near future.