AUDUSD Analysis and Outlook

Bulls turn cautious after less hawkish RBA, 0.6900 mark holds the key

(Haresh Menghani – FXStreet)

– AUD/USD drops sharply on Tuesday in reaction to a less hawkish RBA policy decision.

– The RBA hikes interest rates but hinted at a slowdown in the pace of policy tightening.

– Recession fears, China-Taiwan tensions further weighed on the risk-sensitive aussie.

– Bulls seemed unimpressed and largely shrugged off the prevalent USD selling bias.

The AUD/USD pair witnessed some selling during the Asian session on Tuesday after the Reserve Bank of Australia (RBA) announced its monetary policy decision. As was widely anticipated, the Australian central bank decided to hike interest rates for a fourth consecutive month and lift the cash rate by another 50 bps to a six-year high of 1.85%. Furthermore, the RBA upped its inflation forecasts and downgraded its growth projections. In the accompanying policy statement, the board indicated that further steps in the process of normalising monetary conditions over the months ahead are not on a pre-set path. This, in turn, suggests that the RBA, though might still deliver another 50 bps rate hike in September, is more likely to slow down the pace of its tightening cycle and revert to smaller moves. The less hawkish outlook dragged the benchmark 10-year Australian government bond to its lowest level since April 27 and weighed heavily on the domestic currency.

Apart from this, mounting diplomatic tensions ahead of the planned Taiwan visit by US House Speaker Nancy Pelosi and growing recession fears undermined the risk-sensitive aussie. The combination of factors dragged the AUD/USD pair away from its highest level since June 17 touched the previous day. Bulls largely shrugged off the prevalent selling bias around the US dollar, which continues to be pressured by diminishing odds for more aggressive policy tightening by the Federal Reserve. It is worth recalling that the Fed last week hinted that it could slow the pace of the rate hike campaign at some point. Furthermore, the Advance US GDP report released last Thursday confirmed a technical recession and fueled speculations that the Fed would not hike rates as aggressively as previously estimated. This was reinforced by the recent slump in the US Treasury bond yields, forcing the USD to prolong its downward trajectory for the fourth successive day.

This makes it prudent to wait for strong follow-through selling before confirming that the AUD/USD pair has topped out in the near term and positioning for any meaningful corrective decline. Market participants now look forward to the release of the US JOLTS Job Openings, due later during the early North American session. This, along with the US bond yields, will influence the USD price dynamics and provide some impetus to the AUD/USD pair. Traders would further take cues from the broader market risk sentiment to grab short-term opportunities, though the focus would remain on the US monthly jobs report (NFP), scheduled for release on Friday.

Technical Outlook

From a technical perspective, any subsequent decline is more likely to find decent support near the 0.6910-0.6900 area. This said region marks a short-term descending trend-line resistance breakpoint and should act as a pivotal point. A convincing break below could make the AUD/USD pair vulnerable to challenging the 0.6800 round-figure mark. Some follow-through selling below the latter would shift the bias in favour of bearish traders and expose the 0.6730 support. Spot prices could eventually drop to the 0.6700 mark en-route the YTD low, around the 0.6680 region set on July 14.

On the flip side, the 0.7000 psychological mark now seems to act as an immediate hurdle ahead of the 0.7015-0.7020 region and the overnight swing high, around the 0.7045 zone. Sustained strength beyond the said barriers would be seen as a fresh trigger for bullish traders and lift spot prices to the 0.7100 round-figure mark. The momentum could get extended, which should allow the AUD/USD pair to climb further beyond the 100-day SMA and aim to test the very important 200-day SMA, currently near the 0.7165-0.7170 zone.