The Australian and New Zealand Dollars are edging higher early Tuesday, following through to the upside following dramatic intraday reversals the previous session. Both the Aussie and Kiwi rebounded on Monday after early session weakness following successful tests of key retracement levels that have provided support for several weeks.

At 04:24 GMT, the AUD/USD is trading .7757, up 0.0004 or +0.05% and the NZD/USD is at .7226, up 0.0011 or +0.15%.

With the currencies trading sideways for more than a month, it’s hard to tell without studying the trading volume whether yesterday’s move will eventually lead to a breakout to the upside, but as a trader you have to respect it and hope today’s follow-through rally is supported by real buying volume and not just short-covering.

Helping to cap gains throughout the month have been increased worries over China and its pledge to stop the strong speculative buying in commodities. Underpinning the Aussie and Kiwi has been a weaker U.S. Dollar.

Earlier in the month, the Australian Dollar fell sharply after China’s state planner said it would suspend indefinitely all activities under the China-Australia strategic economic dialogue mechanism.

Sino-Australia trade relations have deteriorated in recent months with China restricting or banning imports of Aussie goods including lobsters, wines, beef and coal.

Helping to underpin the Aussie and Kiwi early Tuesday is the weaker U.S. Dollar. The greenback coasted at the bottom of its recent range against a basket of major currencies Tuesday, as softer-than-expected U.S. data and fresh insistence from Federal Reserve officials that policy would stay on hold allayed investor fears about inflation forcing interest rates higher.

Reuters said that investors are heavily short dollars in the belief that low U.S. rates will drive cash abroad as the world recovers from the pandemic. They have become leery of adding to positions after an April leap in inflation cast doubt on the policy outlook, but seemed to find reassurance in data and Fed remarks overnight.

Story continuesShort-Term Outlook

Today’s early rally suggests investors are keyed in on the direction of U.S. Treasury yields. On Monday, yields drifted lower with little economic data to consider. However, investor focus will shift later this week to Friday’s U.S. April personal consumption expenditure index. This is a measure of inflation that the Fed likes to follow. With rising inflation a major concern for investors, this report could heighten fears that it might force the Fed to tighten its easy monetary policy.

For a look at all of today’s economic events, check out our economic calendar.

This article was originally posted on FX Empire

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