Fri, Aug 12, 2022 @ 20:42 GMT
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Currency Pair of the Week: AUD/USD

The RBA meets on Tuesday this week and is widely expected to leave the Official Cash Rate (OCR) unchanged at a record low of 0.1%.  At the previous meeting, the central bank said that they expect inflation to continue to increase to around 3.25% before declining to 2.75% some time in 2023.  They also reiterated that the central bank was willing to be patient and wait until actual inflation is sustainability within the 2% to 3% target.  Since then, Central Bank Governor Lowe said that he can see the possibility of raising rates before the end of the year.  Traders will be focused on the guidance for this meeting. Markets are pricing in nearly an 80% chance of a rate hike by the June meeting and a total of 170bps of rate hikes for the year.  Any hawkish comments could lead to volatility to the Australia Dollar.

The US will release Minutes from the March 16th FOMC meeting this week.  Recall that at the last meeting, the Committee hiked rates for the first time since 2018 by 25bps to 0.50% and said that it would begin unwinding the balance sheet at an upcoming meeting.  It also said that there are more rate hikes to come.  Since then, Fed member after Fed member have come out with a more hawkish tone, including Fed Chairman Powell who said that, “if the Fed needs to tighten above the neutral rate, it will do so”.  In addition, when Powell was asked what would prevent a 50bps hike in May, the Chairman responded “nothing”.  He also hinted that the Fed will begin unwinding its balance sheet at the next meeting.  Traders will be closely monitoring the Minutes to see if there are any hints how fast the Fed is willing to reduce the assets held on the balance sheet.  In addition to the FOMC minutes, the US will also release the February Trade Balance on Tuesday.

AUD/USD made a low on December 3rd, 2021 at 0.6993 and bounced to 0.7314 in January.  The pair then sold off and retested the lows on January 28th, setting the table for a possible double bottom.  From there, AUD/USD began moving higher once again and didn’t look back.  The pair broke above the neckline for the double bottom on March 3rd, with a target of 0.7660.  After breaking above a trendline dating to August 21st, 2021, the pair consolidated around the 50% retracement level from the highs of February 25th, 2021 (0.8007) to the double bottom lows, near 0.7502.

Source: Tradingview, Stone X

On a 240- minute timeframe, AUD/USD has formed a pennant near 0.7500 and broke out to the upside today.  The target for a pennant formation is the length of the flagpole added to the breakout point of the pennant, which in this case is near 0.7890. (This is also horizontal resistance on the daily timeframe).  However, if price is to get to target, it must first pass through the 61.8% Fibonacci retracement from the daily timeframe, as well as horizontal resistance, near 0.7645. If this proves to be a false breakout of the pennant, support is at the breakout point near 0.7525, then the bottom trendline of the pennant, which confluences with horizontal support near 0.7480.  Below there is horizontal support at 0.7440.

Source: Tradingview, Stone X

With the RBA meeting and the FOMC minutes this week, AUD/USD has the potential for volatility.  Watch for more hawkish comments from the RBA statement to move the pair.  In addition, look for clues in the FOMC minutes which may show how quickly the Fed is willing to unwind its balance sheet.
DISCLAIMER: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase of sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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