PBoC keeps rates unchanged; Australian Dollar retains gains against US Dollar

• Near 0.6985, the Australian Dollar retains its gains against a weaker US Dollar.
• Waning optimism over AI is reducing the US Dollar’s appeal, MUFG argues.
• At 3.00% and 3.50%, respectively, the PBoC’s one-year and five-year LPRs remain unchanged.

The Australian Dollar (AUD) trades near 0.6985 against the US Dollar (USD). It retains two days of gains in early European trading on Tuesday. The pair’s strength reflects continued pressure on the US Dollar amid concerns over Artificial Intelligence (AI).

At the time of writing, a 0.2% decline puts the US Dollar Index (DXY) near 101.77. The index measures the Greenback against six major currencies.

Strong foreign inflows into AI-related stocks have made the US Dollar more sensitive to the AI narrative, market experts argue. They link the currency’s reduced appeal to the sector’s recent correction.

AI-linked inflows heighten Dollar reversal risk

US financial markets have been “a major beneficiary of strong foreign investor demand driven by AI-related optimism.” That is the assessment of MUFG analysts, who point to foreign investors having purchased “USD942 billion of US equities in the twelve months to July, while purchases of US corporate bonds increased sharply to USD452 billion over the same period.” For MUFG, these “sizeable inflows highlight how the USD has become increasingly tied to investors’ search for higher returns in US financial markets, rather than benefiting from its traditional safe-haven status.” Their warning is that “this dynamic also leaves the USD more exposed to a reversal if sentiment towards AI deteriorates.”

Brown Brothers Harriman (BBH) strategists take a different view from MUFG. They reject the argument that the recent “synchronized correction in technology stocks and USD” exposes the Dollar structurally to an AI-led equity sell-off.

Some investors worry that foreign holders unwinding US equity positions could leave the Dollar vulnerable, BBH acknowledges. The strategists counter that “an AI/tech unwind would simply encourage foreign investors to rotate back into safe-haven Treasuries, underpinning the dollar's defensive appeal.” They see a reduction in AI-related equity risk as more likely to strengthen the Dollar’s haven status than weaken it, with foreign demand for US government bonds providing support.

Against other peers, however, the Australian Dollar lags despite its strength against the US Dollar. This follows the People’s Bank of China (PBoC) holding its one-year and five-year Loan Prime Rates (LPRs) at 3.00% and 3.50%, respectively.

Australia’s heavy economic reliance on exports to China means the PBoC’s policy decision has a meaningful impact on its currency.

AUD/USD Technical Outlook

At 0.6984 on the daily chart, AUD/USD retains a bearish short-term bias. Spot remains just below the 20-day exponential moving average (EMA) of 0.6992. Failure to regain that short-term EMA points to constrained upside attempts. Meanwhile, the Relative Strength Index (RSI), near 46, remains neutral, signalling a modest downside bias without yet reaching oversold territory.

The first barrier to an extended recovery is immediate resistance at the 20-day EMA of 0.6992. Holding above that level would alleviate existing selling pressure and allow a more constructive phase. If the pair cannot clear 0.6992, it remains exposed to further declines towards lower daily lows. The current dataset does not yet identify nearby structural support for those lows.

(The technical analysis of this story was written with the help of an AI tool. Know more.)