FX.co ★ AUD/USD going through deep downward correction within overall bullish trend

The quarterly consumer inflation report will be published on July 31. Until its release, any comments regarding the future plans of the Reserve Bank of Australia will remain speculative and have no impact on the market. While the RBA is not providing any hints about a possible rate cut, the likelihood of another rate hike is still valid, standing at more than 15%.

The anticipated labor market report for Q2 did not add any clarity. The unemployment rate rose to 4.1%, with indirect data indicating a way higher increase in June from April and May. At the same time, the number of vacancies went down. The full-time employment rate increased, and the labor force participation rate also grew, which is generally positive data and does not add extra pressure on the RBA's position.

As long as the political situation in the US remains tense, at least until the Democratic Party announces its candidate, it is premature to expect investors to flock to risky assets. One of the main consequences of Biden's withdrawal from the presidential race is the halt of the so-called "Trump trade."

What is the "Trump trade"? It is a bullish play, primarily in the stock market because the equity market is expected to trade higher if Trump wins. Since Trump's victory was viewed as more probable by the markets than Biden's victory, the "Trump trade" encouraged the demand for risk. After Biden exited the presidential race, Wall Street has been in limbo. The probability of Trump winning is still higher than that of the Democratic candidate, but the fact that a stronger opponent for Trump has emerged before the elections forces investors to be cautious. This uncertainty has led to a notable decline in demand for risky assets.

At the same time, any pullbacks can be viewed as buying opportunities as the Federal Reserve is likely to venture into the first rate cut at the meeting on July 31. Meanwhile, the Australian dollar remains under selling pressure in the short term, despite the overall bullish trend.

A net long position of AUD 586 million was added last week, bringing the speculative net long to AUD 748 million, the highest level for the AUD since May 2021. The estimated price is rising steadily.

The AUD/USD pair has significantly corrected, responding to the sharp increase in demand for safe-haven assets and the general sentiment for the aussie dollar. The medium-term trend remains bullish as long as the currency pair is settled above 0.6575. However, there is no doubt that market participants will have to reassess the AUD prospects this week since mounting political uncertainty in the US cannot be ignored by the markets. Under these conditions, we can only observe the internal factors that have been driving the demand for AUD take a backseat. As AUD/USD approaches 0.6575, traders can buy setting a stop loss slightly below the support line as fundamentally, the currency pair can resume growth towards 0.6800. If the price falls below 0.6575, the chances of a renewed rise will decrease significantly.