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The Australian dollar continues to drop against its US counterpart in its third straight day of losses. AUD/USD is currently trying to settle near 0.6800, as bears hold the initiative. The US dollar index (DXY) has risen to 104.50 after falling to 103.50 earlier, which weighed down on the Australian dollar.
AUD is following USD, ignoring its own fundamental factors. According to the latest data, retail sales in Australia rose to 0.9% in May, well above a projected decline to 0.3%. However, the pair continued to slide down after a brief rally.
The US dollar is on the rise amid renewed speculation on the Fed's monetary tightening cycle. The sentiment of market players is swinging wildly. Earlier, USD was under pressure following the release of disappointing consumer confidence data by the University of Michigan. The index fell to 50 points, down from 58.4 in May. The Conference Board's Consumer Confidence Index decreased to 98.7 points from 103.2. The Federal Reserve has not yet decided on the size of its next interest rate move. According to Jerome Powell, the Fed would hike the rates by 50 or 75 basis points in July. Market players doubted the regulator would stick to its monetary tightening plans, resulting in USD retreating against other currencies such as AUD.
However, the US currency recovered following hawkish statements by several Fed policymakers. John Williams, the president of the Fed Reserve Bank of New York, said that the Federal Reserve should raise the Fed funds rate to a range of 3% to 3.5% by later this year. He also confirmed that the regulator was considering a 75 bps hike in July.
Williams was joined by Loretta Meister, the president of the Fed Reserve Bank of Cleveland, who stated today that she would support a 75 bps move. She stated that she sees interest rates surpass 4% in 2023.
On Thursday, US Personal Consumption Expenditures index data will be published. If the data exceeds expectations, it would make a 75 bps hike in July more likely - even wavering FOMC board members could likely support hawkish policy measures.
The Australian dollar is also under pressure from falling iron ore prices in the commodity market. Iron ore prices at the Dalian Commodity Exchange has slumped by more than 10% due to a number of factors, such as quarantine measures in China, disruptions in the Chinese construction sector, and oversupply amid falling demand. Australia is the world's leading producer and exporter of iron ore, and the Australian economy is vulnerable to price swings of the commodity.
China is the world's biggest importer of iron ore, with more than 80% of its ore consumption coming from imports.
AUD/USD could decline further, particularly if tomorrow's US PCE data release matches or exceeds expectations. Despite the hawkish position of the Reserve Bank of Australia, the Aussie is influenced by the rising US dollar, which is supported by statements of Fed policymakers.
On the technical side, the pair is currently moving between the middle and lower bands of the Bollinger Bands indicator on the daily chart, as well as below the Ichimoku cloud. The closest bearish target is 0.6830, the lower band of the Bollinger Bands indicator. The main target in the medium term is 0.0680, which is the lower band of the same indicator on the weekly chart.
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