Aussie Struggles for Traction as China Deflation Deepens, RBA Cut Bets Mount

Key Takeaways:

*China deflation deepens, with weak CPI and PPI figures underscoring fragile demand and weighing on AUD via trade exposure.

*RBA rate cut odds rise, as soft Q1 GDP and sluggish consumption push markets to price in July easing with 86% probability.

Market Summary:

The Australian dollar remains pinned just below the 0.65 handle, weighed down by persistent disinflationary signals from China and a deteriorating domestic growth outlook that’s amplifying calls for monetary easing. China’s CPI fell 0.1% YoY in May—its second straight monthly contraction—while PPI plunged 3.3%, underscoring weak demand and industrial overcapacity. This casts a shadow over commodity-linked currencies like the Aussie, given Australia’s trade dependence on China.

Beijing’s cautious stance was also evident during the resumption of the U.S.–China trade talks in London. While the headlines briefly buoyed risk sentiment, the lack of new stimulus limited follow-through. Markets remain unconvinced that diplomatic progress alone will lift AUD/USD without a clearer rebound in Chinese demand.

Domestically, Australia’s economy continues to sputter. Q1 GDP rose just 0.2% q/q as household consumption stalled, while underwhelming retail sales and PMIs highlight the economy’s lack of internal momentum. With inflation softening, markets now price in an 86% chance of a 25bp RBA rate cut on July 4.

Meanwhile, U.S. jobs data beat expectations, with nonfarm payrolls up 139K and wages rising 3.9% YoY—reinforcing the Fed’s cautious stance and keeping Treasury yields firm. The resulting yield differential continues to cap AUD upside.

Technical Analysis 

AUDUSD, H4

AUD/USD continues to hover just beneath the 0.6526 resistance level, with price action pressing against the upper edge of a developing symmetrical triangle. Despite holding above a rising trendline from late May, recent sessions have shown signs of hesitation, with upward momentum stalling near the apex of the coiling structure.

While the broader bullish bias remains intact—supported by higher lows and repeated defenses of the 0.6455 and 0.6410 zones—the failure to push decisively through overhead resistance raises doubts about the sustainability of the move. Price remains firm above 0.6485 for now, but the inability to generate follow-through suggests fading conviction.

Momentum indicators offer a cautiously constructive backdrop. The RSI holds around 61, pointing to moderate bullish strength while staying short of overbought territory. However, the MACD line is only slightly above the signal line, with the histogram flattening—hinting at a loss of thrust that could evolve into a bearish crossover if momentum weakens further.

Resistance levels:0.6526, 0.6570

Support levels: 0.6485, 0.6455