Fundamental Outlook for US Dollar: Neutral

- Business Confidence Rebounds
- Consumer Confidence Weakens The Most In Three-Months
- Inflation Expectations Gather Pace in September

The Australian dollar extended the rally from earlier this month to reach a fresh yearly high of 0.9467, and the high-yielding currency could face increased volatility over the following week as the Reserve Bank of Australia is scheduled to release its policy meeting minutes on September 21. As the AUD/USD continues to pare the decline from the 2008 high (0.9849), the exchange rate may make another run at parity as policy makers maintain an improved outlook for the $1T economy.

RBA Governor Glenn Stevens expects growth and inflation to trend close to target after holding the benchmark interest rate at 4.50% earlier this month, and sees strong growth in business investment as the region benefits from the marked expansion in China, Australia’s largest trading partner. At the same time, assistant Governor Philip Lowe sees the economy operating close to full-capacity in the following year and expects the labor market to improve going forward as firms increase production and employment. With the economic recovery gathering pace, the central bank may adopt a hawkish tone for future policy and see scope to tighten monetary policy further as the risks for inflation intensify. Increased speculation for a rate hike in October could support the underlying strength behind the Australian dollar and the lead the exchange rate to push higher over the near-term.

The AUD/USD looks posed to test 0.9500 for psychological resistance as price action continues to trade above the 10-Day moving average at 0.9281, but there could be a short-term phase of consolidation over the following week as the daily relative strength index falls back from a high of 70. If a corrective retracement unfolds in the days ahead, we would expect price action to fall back towards the lower bounds of its recent range roughly around 0.9300, but a bigger below the 10-Day SMA would expose the August highs around 0.9200. However, hawkish comments from the RBA could lead the rally to gather pace and drive the exchange rate to make another attempt at parity.

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