AUD/USD Near 4-Month High As US CPI Tests Rally

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This currency pair consolidated in early trade on Tuesday after touching its highest level in nearly four months Monday as growing expectations of a domestic interest rate hike later this month overshadowed Friday's better-than-expected U.S. jobs report. Still, the outlook for the pair remains uncertain this week with eagerly awaited U.S. inflation data on the economic calendar having the potential to shift U.S. rate expectations and AUD/USD positioning Rate Hike Expectations Continues to Drive AUD/USD Positioning, U.S. Inflation Data in Focus

Despite the pair initially selling off following U.S. nonfarm payrolls and unemployment data exceeding economists' expectations, buyers quickly re-emerged, suggesting underlying bullish sentiment and a focus on growing expectations that the Reserve Bank of Australia (RBA) will lift interest rates later this month. Following recent robust domestic inflation and economic growth numbers, markets now price in around a 70% chance of a September rate hike, which would mark the fourth time this year the central bank has raised interest rates

However, as expectations have grown that the Federal Reserve will also lift its benchmark funding rate later this month following Fed Chair Kevin Warsh's hawkish Jackson Hole address and Friday's better-than-expected employment data, traders will pay close attention to important readings this week on U.S. inflation to determine if the AUD/USD has further to run or is ready for a possible pullback.

Over the course of Thursday and Friday, market participants will assess key readings on producer and consumer inflation, with hotter-than-expected prints likely to strengthen the Greenback and pause the Australian dollar's recent rally as expectations of a more hawkish Fed gather momentum. Conversely, softer inflation data could underpin the pair's recent strength, potentially acting as a catalyst for the next move higher/USD Technical Structure

After hitting its highest trading level in nearly four months on Monday, the pair took a breather in early trade Tuesday, breaking down below a pennant pattern to caution traders about a potential retracement. Still, the 50 moving average appears to be providing near-term support.-p

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AUD/USD Price ChartKey Support Levels to Monitor

Further downside could see the pair initially revisit the 0.7205 level. This location on the chart may attract buying interest near a range of early September consolidation, which also closely aligns with the prominent August 28 swing high.

Selling below this key support level opens the door for a retracement toward 0.7185. Traders could look to open long positions in this area near the upward sloping 200 moving average and a horizontal line that connects a series of price action on the chart stretching back to several late August peaks.

A deeper pullback would bring the 0.7165 region back into play. The pair may find support at this level near a series on corresponding price action on the chart between August 25 and September 3.Important Overhead Levels Worth Watching

If the pair regains its bullish momentum, it's worth keeping tabs on the important 0.7225 area. Traders who accumulated long positions at lower levels could look for profit-taking opportunities in this region near Monday's highs.

To project a price target above Monday's high, traders can use bars pattern analysis. When applying the study, we take the bars comprising the impulsive move higher following a flag pattern (marked in green square) and reposition them from the low of a potential bear trap currently forming beneath the pennant pattern. This forecasts a target of around 0.7260, about 45 pips above the pair's current trading levels.U.S. Inflation Data Likely AUD/USD's Next Driver

Traders will turn to this week's key U.S. inflation data to determine if the AUD/USD rally has further to run or is due for a retracement. Numbers later this week that support a more hawkish Fed would narrow the interest rate expectation outlook between the two central banks and potentially see profit-taking in the pair. However, data signalling weakening pricing pressures could see the Australian dollar extend its bullish move higher.

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EURUSD Chart by TradingView

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