• The Australian dollar gained on risk-on sentiment following lower expected 5-year unit inflation rates on Friday.
• Australian shares rose above 7,770 after Friday’s gains on Wall Street.
• The US dollar weakened after UoM (May) 5-year consumer inflation expectations fell to 3.0% from an estimate of 3.1%.

The Australian dollar (AUD) strengthened against the US dollar (USD) for the second consecutive time on Monday as overall market risk appetite improved despite waning expectations for Federal Reserve interest rate cuts. Meanwhile, investors are eagerly awaiting Wednesday’s Monthly Australian Consumer Price Index report, seeking information on the trajectory of domestic monetary policy.

The Australian dollar may gain in value as the latest minutes of the Reserve Bank of Australia (RBA) meeting show that it is arduous for the board to predict future interest rate changes, admitting that the latest data increases the likelihood of inflation remaining above the 2-3% target for a long time.

The US dollar (USD) weakened after the University of Michigan released five-year consumer inflation expectations for May on Friday. It decreased slightly to 3.0%, below the forecast 3.1%. Despite an upward revision of the Consumer Confidence Index to 69.1 from a flash reading of 67.4, it was still at its lowest level in six months. This data likely contributed to strengthening investor sentiment regarding potential interest rate cuts by the Federal Reserve.

According to the CME FedWatch Tool, the likelihood of the Federal Reserve cutting interest rates by 25 basis points in September fell to 44.9% from 49.0% the week before. It is worth noting that the American market will be closed due to the Memorial Day public holiday falling on Monday.

Market overview: The Australian dollar is gaining as risk sentiment improves

• The ASX 200 index rose above 7,770 on Monday, with almost all sectors recovering from the previous week’s losses. Australian shares also followed Wall Street’s gains from Friday as risk appetite improved.
• The U.S. Census Bureau released hard-wearing goods orders on Friday, showing a solid recovery in April, with a 0.7% month-over-month gain, compared with a forecast decline of 0.8%. However, March data was revised down to 0.8% from initial estimates of 2.6%.
• On Thursday, Australian consumer inflation expectations for future inflation over the next 12 months fell to 4.1% in May from 4.6% in April, the lowest level since October 2021.
• The S&P Global US Composite PMI rose to 54.4 in May, setting the highest level since April 2022. The Services PMI rose to 54.8, indicating the strongest manufacturing growth in a year, while the Manufacturing PMI rose to 50.9.
• Reuters cited Chinese state media reports on Thursday that said China had deployed numerous fighter jets and carried out simulated attacks in the Taiwan Strait and around groups of islands controlled by Taiwan. Any geopolitical tensions in the region could impact the Australian market as China and Australia are close trading partners.

Technical Analysis: Australian Dollar Tests Nine-Day EMA Followed by Key Level 0.6650

On Monday, the Australian dollar is trading at around 0.6630. The 14-day relative strength index (RSI) is just above the 50 level, indicating a bullish bias. Analysis of the daily chart shows that the AUD/USD pair is testing the lower boundary of the rising wedge. A return to the wedge would suggest a strengthening of the bullish bias.

The nine-day exponential moving average (EMA) at 0.6634 and the lower boundary of the rising wedge provide immediate resistance. A break above this level could prompt AUD/USD to test the four-month high at 0.6714 and then the upper boundary of the ascending triangle around 0.6730.

On the other hand, the key support could be the psychological level of 0.6600, followed by the main level of 0.6550. A further decline could put downward pressure on the AUD/USD pair, potentially pushing it towards the reverse support area at 0.6470.

AUD/USD: Daily chart