Australian Dollar holds gains following stronger Chinese PMI data

AUD/USD gains ground for the second consecutive day, trading around 0.7170 during the Asian hours on Tuesday. The pair appreciates as the Australian Dollar (AUD) remains stronger following the release of China‘s RatingDog Manufacturing Purchasing Managers’ Index (PMI), which climbed to 51.5 in August from 50.9 in July. The market forecast was for a 50.9 reading. China and Australia are close trading partners, so any change in Chinese economy could impact the AUD.

Australias Building Permits slipped 3.6% month-over-month (MoM) in July, against the expected decline of 4.8% and the previous reading of 7.2% increase. Total dwellings unit approved increase 9% year-over-year (YoY), against the 8.9% increase prior.

The upside of the AUD/USD pair is restrained as the US Dollar (USD) rebounds amid hawkish sentiment surrounding the US Federal Reserve (Fed) policy stance. Traders increased their bets on a September rate hike after Warsh said the Fed will “have work to do” if policymakers are not confident that underlying ‌inflation is returning to its 2% target.

Strategists at Scotiabank note that recent Fed commentary has sharpened the policy outlook, with officials “effectively removed ambiguity around the Fed‘s inflation target” and issuing “a clear warning that unless inflation makes progress towards the 2% target ’with speed, the Fed could be pushed to tighten policy.” This firmer guidance on the inflation objective is seen as reinforcing higher rate expectations into the September FOMC and helping to underpin the Dollar, even as it gives back part of its latest gains.

Feds Goolsbee delivered a moderately hawkish-leaning message, with a 6.2/10 FXS Speechtracker score just above the 6.1/10 historical average, underscoring inflation as the central policy challenge. Agreement with Warsh on the economic backdrop and the emphasis that inflation from overheated demand is “hard to address” and has lasted longer than expected highlight concern about price pressures, even as Goolsbee signaled comfort with holding rates steady at the July FOMC and downplayed procedural issues like the number of meetings. The tone suggests a Fed still firmly focused on inflation, but not in a rush to tighten further absent clearer evidence of renewed demand-driven price acceleration.

The FXS Fed Sentiment Index slipped by 0.41 points to 129.29, indicating a modest pullback in perceived hawkishness following the speech. Despite the decline, the index remains well above the neutral 100 threshold, signaling that Fed communication is still firmly in hawkish territory, with Goolsbees remarks reinforcing inflation as the main issue even as the FXS Speechtracker score only marginally exceeds the established baseline.

In the daily chart, AUD/USD trades at 0.7170, maintaining a bullish near-term bias as price holds above both the nine- and 50-day Exponential Moving Averages (EMAs). The alignment of the shorter EMA above the longer one reinforces an upward trend structure, while the 14-day Relative Strength Index (RSI) at 64.24 stays in positive territory without yet reaching extreme overbought conditions.

On the downside, immediate support is seen at the nine-day EMA near 0.7156, followed by the 50-day EMA at 0.7071, which together define a nearby demand zone. Below these, deeper structural support levels are located at 0.6688, 0.6434 and 0.6348, where buyers would be expected to re-emerge if a broader corrective phase unfolds.

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

One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.

The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.

China is Australias largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.

Iron Ore is Australias largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.

The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.