AUD Retreats on Weak China PMI, Cooler Inflation

Key Moments

Australian Dollar Softens After Chinese Data Miss

AUD/USD trades on the back foot around 0.7020 during Friday’s Asian session, retreating after posting gains of more than 1% in the previous session. The currency pair loses momentum following weaker-than-expected Chinese Purchasing Managers’ Index (PMI) readings that point to a slowdown in Australia’s key export market.

China’s official NBS Manufacturing PMI declines to 49.2 in July, slipping below the 50 threshold that marks expansion and contraction. The reading compares with 50.3 previously and falls short of market expectations of 50.0. The Non-Manufacturing PMI also weakens, printing at 49.0 versus forecasts for 50.0, reinforcing concerns about softening activity across the broader Chinese economy.

The deterioration in both manufacturing and services gauges highlights persistent challenges in China, amplifying headwinds for the Australian Dollar given the country’s deep trade ties with China.

Cooling Australian Inflation Dims Near-Term RBA Hike Prospects

On the domestic front, the Australian Dollar remains under pressure as recent inflation figures reduce the likelihood of a near-term move by the Reserve Bank of Australia (RBA). Softer second-quarter price data are seen as effectively taking an August rate increase off the table.

Analysts at Deutsche Bank emphasize that the latest numbers point to a further moderation in inflation dynamics, noting that “annual inflation moderated from +4.0% to +3.8% yoy.” According to their assessment, this incremental easing in headline inflation supports the view that underlying price momentum is gradually fading. This helps dampen expectations for additional imminent tightening by the RBA and contributes to a more subdued tone in the Australian Dollar.

US Dollar Supported by Fed Stance and Easing Geopolitical Risks

The US Dollar (USD) holds its ground even as overall risk sentiment improves on the back of more constructive geopolitical developments. Signs of reduced tensions in the Middle East emerge as discussions between the United States and Iran advance toward stabilizing the situation in the Strait of Hormuz.

Risk appetite receives an additional boost after US President Donald Trump announces what is described as a landmark deal aimed at disarming Hamas and facilitating the withdrawal of Israeli forces from Gaza, an arrangement that senior Hamas officials are reported to have confirmed.

Despite the brighter risk backdrop, the Greenback remains resilient, underpinned by the US monetary policy stance. Strategists at HSBC highlight that the US Federal Reserve “left interest rates unchanged for a fifth consecutive meeting, in line with expectations,” while underscoring that the “9-3 vote revealed a lively debate within the FOMC,” reflecting notable internal differences over the future policy trajectory.

NBS Manufacturing PMI: Key Details and Market Relevance

The NBS Manufacturing Purchasing Managers Index (PMI), jointly released by the China Federation of Logistics & Purchasing (CFLP) and China’s National Bureau of Statistics (NBS), functions as a forward-looking gauge of activity in China’s manufacturing sector. The index is compiled from survey responses of senior executives at manufacturing firms, who compare current-month conditions with those of the prior month.

Readings span from 0 to 100, with 50.0 indicating no change in conditions relative to the previous month. Levels above 50 generally signal expanding manufacturing activity, typically viewed as constructive for the Renminbi (CNY). By contrast, values below 50 suggest contracting output among goods producers, which is seen as negative for CNY.

Why the Chinese Manufacturing PMI Matters for Markets

The monthly manufacturing PMI is published by the China Federation of Logistics and Purchasing (CFLP) on the final day of each month. It precedes the Caixin Manufacturing PMI, enhancing its role as an early signal of manufacturing sector conditions in China, which is widely regarded as a core component of the country’s economy.

Because of China’s significant footprint in global trade and economic activity, the NBS Manufacturing PMI is closely monitored across financial markets. The indicator can foreshadow trends in key macroeconomic series such as Gross Domestic Product (GDP), industrial production, employment, and inflation. As a result, it exerts influence across multiple asset classes, including currencies, equities, commodities, and fixed income.