AUD/USD tests the 21 DMA at 0.7050

• AUD/USD has rebounded from a previous test of 0.7000 and is testing its 21 DMA around 0.7050.
• The Aussie is receiving tailwinds from global equity and commodity markets, as well as strength from the yuan following the PBoC’s surprise rate cut.
• The AUD remains vulnerable if risk appetite deteriorates and the dollar rises again, with the Federal Reserve Minutes and key US data due next week.

The rebound in global equities, coupled with rising industrial metal prices following the latest move by the People’s Bank of China to cut its 5-year prime rate, which should boost the country’s struggling real estate sector and , by the way, has put the yuan on track for its best week of the year, it’s benefiting the AUD on Friday.

The AUD/USD it found good support earlier in the session when it pulled back towards the key psychological 0.7000 level, and has now re-consolidated near its 21-day moving average at the 0.7050 area, up 0.15% on the day. The 21-day moving average has been a key resistance level in recent weeks and a break above it could set the stage for a push above 0.7100 and even towards the next key resistance area at 0.7250 (the moving averages of 50 and 200 plus the maximum for this month).

If sentiment around the Chinese economy continues to improve next week, a breakout to the upside is certainly a possibility (either because of bets on further PBoC easing, a lockdown easing, or both). But an upward push for AUD/USD would also depend on continued weakness in the US dollar, as seen in recent days.

Although DXY has retraced more than 2% from last week’s highs above 105.00 and is above 102.50, dips have consistently been good buying opportunities in recent weeks amid the reversal of stance in the Federal Reserve and continuing evidence of high inflation and a tight labor market. This has not only supported the dollar, but has also hurt risk appetite, reducing sentiment towards the risk-sensitive Aussie.

Although AUD/USD is trading more than 3% above previous monthly lows in the 0.6800 area, the pair is still down around 8% from its early April highs. Fed tightening will continue to be in the spotlight next week, with more Fed policymakers weighing in and the release of the Fed meeting minutes from earlier in the month (in which they hiked rates by 50 basis points and noted that there will probably be more 50 basis point moves) on Wednesday.

US data, in the form of a second estimate of Q1 GDP growth (recall that the first estimate showed a surprising contraction in output) on Thursday and core PCE inflation figures for April on Friday, also will be the object of attention. The data could underpin recent stagflation fears, which could further dampen risk appetite and weigh on the risk-sensitive Australian dollar.

Technical levels