The recent downturn in the AUDUSD pair is a challenging situation to read considering the different factors influencing price momentum at present. While the US dollar has been rallying since the FOMC Meeting Minutes which underlined the more bullish attitude of Federal Reserve officials, strong housing data from Australia has buoyed the local currency after nearing lows last seen during March.

Nevertheless, with the outlook for interest rates in both regions diverging, the stage might be set for further losses in AUDUSD, helping Australian policymakers concerned with the strength of the local currency and falling inflation. As Australia’s major trading partner China continues to undergo an economic transition, the export economy will continue to come under pressure, forcing Government and Central Bank officials to stimulate other key sectors with accommodative policies. Meanwhile, another rate hike from the US could raise speculation of more tightening in the pipeline, heightening the downside risks in the pair.

Fundamentally Speaking

Monetary policy continues to be a major driver of bearish behavior of the AUDUSD currency pair, with each Central Bank taking a different view towards the outlook. After the RBA slashed another 25 basis points from the cash rate earlier in the month, forward looking estimates point towards another rate cut in the fourth quarter, coinciding with expectations of falling inflation. Even though strengthening housing data is adding to optimism that areas outside of the natural resources sector are growing, an upcoming report on first quarter GDP will give further indications about the robustness of the current expansion. By comparison, rising inflation in the United States combined with a more hawkish attitude on the part of Central Bank officials might see rates climb to between 1.00-1.25% by the end of 2016.  Sustained normalization contrasts sharply with anticipation of further RBA accommodation, driving a wedge between the currencies.