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- AUD suffers sixth day of losses ahead of multiple fundamental risks.

- AUD eyes Q2 inflation figures and Chinese economic data overnight.

- Wednesday brings threat of AUD disappointment over Fed guidance.

- But Commerzbank analyst eyes chart support for AUD at market levels.

- GBPAUD at 2019 low in third day of losses as Brexit selling intensifies.

The Australian Dollar suffered its sixth consecutive day of losses Tuesday and could still face further declines as a series of risk events loom large over the Antipodean currency, although technical analysts at Commerzbank say the Aussie could find support around current levels.

A U.S. Dollar that's stabilising ahead of an eagerly-anticipated Federal Reserve (Fed) interest rate decision helped force the Australian unit into retreat Tuesday but it's second-quarter inflation figures and the latest batch of Chinese economic numbers that will pose a threat to the Antipodean currency on Wednesday.

Markets are looking for the three months to the end of June to have marked another quarter of below-target inflation that does little, if anything, to discourage the Reserve Bank of Australia (RBA) from cutting its interest rate for a third time later this year. Consensus is for the consumer price index to have risen from 1.3% to 1.6% in the recent quarter but the RBA's preferred 'trimmed mean' measure of inflation is seen falling from 1.6% to 1.5%.

The RBA has long sought to get inflation within the 2%-to-3% target band and has cut its cash rate twice in 2019, taking it down to a fresh record of 1%, to achieve this end while financial markets are betting heavily it'll cut again in November.

"AUD/USD has scope to recover if inflation quickens more than expected. But more evidence Chinese manufacturing activity is contracting (China’s July manufacturing PMI is projected to print at 49.6) will contain AUD/USD relief rallies," says Elias Haddad, a strategist at Commonwealth Bank of Australia.

Above: AUD/USD and AU-U.S. yield spread (black line, left axis). Yield advantage turns to handicap.

Changes in rates are normally only made in response to movements in inflation, which is sensitive to growth, but impact currencies because of the push and pull influence they have over capital flows. Those flows tend to move in the direction of the most advantageous or improving returns, with a threat of lower rates normally seeing investors driven out of and deterred away from a currency.

If inflation data due out at 02:30 London time Wednesday disappoints the market then it's unlikely to be helpful for the Australian Dollar, although with investors already betting on another rate cut this year a surprise on the downside wouldn't necessarily do severe damage to the Aussie. However, those aren't the only economic figures looming over the Antipodean currency.

The China Federation of Logistics and Purchasing is set to publish its July manufacturing PMI at 02:00. Consensus is looking for the PMI to rise from 49.4 to only 49.6, leaving it below the 50 level separating industry expansion from contraction. Any surprise on the downside would also be enough to upset the Aussie because China is Australia's largest commodity export customer.

Above: TD Securities graph of market-implied probabilities for July and September Fed rate cuts.

"While no other central bank in the G10 can compete with the Fed's policy rate cut runway, it could be some time before USD cracks sink the reserve currency. Even if the Fed eases by 75bps the market has already built the vast majority of this into the curve for this year. Even if delivered in full, the USD will remain the carry king among G10 currencies," says Mazen Issa at TD Securities.

If the Australian Dollar makes it into the London session Wednesday without being further dented, it will then face another test during the evening hours in the form the U.S. Federal Reserve, which is widely expected to begin cutting its interest rate at 19:00 London time. Consensus is for just a 25 basis point cut to be followed by guidance suggesting the Fed Funds rate could fall another 50 basis points to 1.75% before the end of March 2020.

However, those expectations are yet to make a meaningful dent in the U.S. currency, in part because of the dire state of the global economy as well as the actions of other central banks. And U.S. GDP growth has proven more robust than markets had previously given credit for of late, which could mean there's a risk the Fed won't be willing to provide the full amount of rate cuts that markets have come to take for granted. That would boost the U.S. Dollar and take the AUD/USD rate lower.

"AUD/USD remains under pressure following its sell off last week from a very tough band of resistance, namely .7062/85. This is the location of the 200 day moving-average and the 8 month downtrend. We look for losses to support at .6865/55, the 17th May low and 2019 uptrend, which we suspect will hold the initial test," says Karen Jones, head of technical analysis at Commerzbank, referring at the end to an AUD/USD price level that was reached Tuesday.

Above: AUD/USD rate shown at daily intervals. Also features 200-day moving-average (yellow line).

"The more realistic way to unlock the Brexit political gridlock would be to hold new general elections. Until we have more clarity on the future Brexit path, GBP will remain under broad downside pressure," says CBA's Haddad.

Australia's Dollar was not the only G10 currency seen on its back foot Tuesday because Pound Sterling has been clobbered so far in the new week by short-sellers responding to the Prime Minister Boris Johnson's inaugural pivot in the Brexit negotiations. Johnson has eschewed Brexit talks with the EU and claims he'll take the UK out of the bloc via a 'no deal' Brexit at the end of October if Brussels doesn't remove the so-called Northern Irish backstop from the agreement it struck with Theresa May.

"The Prime Minister made clear that the government will approach any negotiations which take place with determination and energy and in a spirit of friendship, and that his clear preference is to leave the EU with a deal, but it must be one that abolishes the backstop," says a Downing Street spokesperson, following a conversation between PM Johnson and his Irish counterpart. "The UK will be leaving the EU on October 31, no matter what."

The EU has long claimed it won't alter the agreement struck with Theresa May, which risks entrapping the UK or parts of it inside the customs union and beneath the EU's legislative umbrella indefinitely if the government cannot satisfy Brussels' demands in the next stage of the negotiations. Increasing numbers of analysts are now saying the only way out of the current Brexit mire is through a general election, although that would risk opening up another can of worms for the British currency.

Failure to agree terms of exit with the EU before October 31 will automatically result in a 'no deal' Brexit unless the Prime Minister requests another Article 50 extension in the event that parliament fails to force a general election before then. The Pound-to-Australian-Dollar rate hit a fresh 2019 low on Tuesday as concerns over the UK's Brexit path mounted further.

"It seems clear that the UK situation is unsustainable and because it has a deadline, something MUST happen. Probably another election, but if not, then hard Brexit and back to the drawing table for the trade deal," says Barbara Rockefeller at RTS Forex. "If no trade deal can get done, and nobody wants to deal with Boris, that’s when we start talking about the pound back to parity or near parity with the dollar, as in Feb 1985 (when we went on a shopping spree in London and blew $10,000 in three days)."

Above: Pound-to-Australian-Dollar rate shown at daily intervals.

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