Australian Dollar steadies amid improved market sentiment, eyes on US-China trade talks

• The Australian Dollar holds ground due to a risk-on mood following the US-EU trade deal.

• The United States and China are expected to extend their tariff truce by another three months.

• Traders await Australian Q2 CPI data due on Wednesday, seeking impetus for the next RBA interest rate decision.

The Australian Dollar (AUD) maintains its position on Monday, after registering losses in the previous two sessions. The AUD/USD pair gained ground following the announcement of a newly established trade agreement between the United States (US) and the European Union (EU).

Traders await further development on the meeting between US Treasury Secretary Scott Bessent and Chinese Vice Premier He Lifeng, scheduled on Monday in Stockholm. The two countries are expected to extend their tariff truce by another three months, according to a source cited by the South China Morning Post (SCMP) on Sunday. It is important to note that any changes in the Chinese economy could impact the AUD as China and Australia are close trade partners.

Australian Q2 CPI data will be eyed on Wednesday as the data is critical for the next Reserve Bank of Australia RBA) interest rate decision. RBA Governor Michele Bullock committed last week to ensure that inflation stays low and stable moving forward. Bullock also noted ongoing uncertainty in the global economy.

Australian Dollar holds gains as US Dollar struggles amid risk-on sentiment

The US Dollar Index (DXY), which measures the value of the US Dollar against six major currencies, is holding losses for the third successive session and trading around 97.60 at the time of writing. The Greenback struggles as the market sentiment improves following the trade deal between the US and the EU.

The United States and European Union reached a framework trade agreement on Sunday that sets 15% tariffs on most European goods, taking effect on August 1. This deal has ended a months-long stand-off, per Bloomberg.

US Initial Jobless Claims fell to 217,000 last week, down from 227,000 and 221,000 in the prior weeks. This marks the sixth consecutive weekly decline, the longest streak since 2022, underscoring the resilience of the labor market.

The preliminary S&P Global US Composite Purchasing Managers Index (PMI) data rose to 54.6 in July, up from 52.9 in June, signaling the fastest pace of overall business activity in seven months. The Services PMI rose to 55.2, beating expectations of 53.0 and reflecting solid demand in the services sector. However, the Manufacturing PMI dropped to 49.5, down from a prior reading of 52.0 and below the forecast of 52.5, slipping into contraction territory.

US Treasury Secretary Scott Bessent noted that a nominee for the next Federal Reserve Chair is likely to be announced in December or January. Bessent emphasized that there is “no rush” to select a successor to current Fed Chair Jerome Powell, noting that the nominee could come from current board members or the heads of the district banks, according to Bloomberg.

Fed Governor Adriana Kugler said earlier that the US central bank should not lower interest rates "for some time" since the effects of the Trump administration's tariffs are starting to show up in consumer prices. Kugler added that restrictive monetary policy is essential to keep inflationary psychology in line.

San Francisco Fed President Mary Daly said that expecting two rate cuts this year is a "reasonable" outlook, while warning against waiting too long. Fed Governor Christopher Waller believes that the US central bank should reduce its interest rate target at the July meeting.

The latest Reserve Bank of Australia (RBA) Meeting Minutes indicated that the board agreed further rate cuts were warranted over time, with attention centered on the timing and extent of easing. The majority believed it was best to await confirmation of an inflation slowdown before easing. Most members felt cutting rates three times in four meetings would not be "cautious and gradual.”

Australian Dollar could find support at nine-day EMA near 0.6550

AUD/USD is trading around 0.6570 on Monday. The daily chart’s technical analysis indicates a prevailing bullish bias as the pair remains within the ascending channel pattern. The 14-day Relative Strength Index (RSI) is positioned above the 50 mark, strengthening the bullish bias. Additionally, the pair remains above the nine-day Exponential Moving Average (EMA), indicating that short-term price momentum is stronger.

On the upside, the AUD/USD pair may target the initial barrier at the eight-month high at 0.6625. A break above this level would support the pair to approach the ascending channel’s upper boundary around 0.6680.

The AUD/USD pair could test its primary support at the nine-day EMA of 0.6560. A break below this level could weaken the short-term price momentum and put downward pressure on the pair to test the 50-day EMA of 0.6508, followed by the ascending channel’s lower boundary around 0.6490.

AUD/USD: Daily Chart