Bullish view
Buy the AUD/USD pair and set a take-profit at 0.7200.
Add a stop-loss at 0.7050.
Timeline: 1-2 days.
Bearish view
Sell the AUD/USD pair and set a take-profit at 0.7050.
Add a stop-loss at 0.7200.
The AUD/USD pair retreated for the second consecutive day as US and Australian bond yields continued rising, reaching their highest levels in years. It slipped to 0.7130 also as investors waited for the first Federal Reserve interest rate hike of the year.
Federal Reserve Expected to Hike Interest Rates
The AUD/USD pair continued its strong downward trend as market participants waited for the closely watched Federal Reserve interest rate decision. This decision comes after the US released several important macro data.
A report released earlier this month showed that the US economy added 162k jobs as the unemployment rate remained at 4.1%. That report suggested that the labor market was doing fairly well since the BLS also revised the July jobs report upwards.
Another report released last week showed that the country’s consumer inflation continued rising last month. The headline and core Consumer Price Index (CPI) remained above the Federal Reserve’s 2% target.
Therefore, most market participants believe that the Fed will decide to hike interest rates by 0.25% to between 3.75% and 4% in this meeting. The CME FedWatch tool places the probability of a rate hike at 94.5%.
The rate hike comes as the price of crude oil continues rising, with Brent nearing the crucial resistance level of $110. Similarly, gasoline and diesel prices have continued soaring, with the latter being at a record high.
US and Australian bond yields have also continued rising. In the US, the ten-year has jumped above the crucial resistance level of 5% and is now hovering at its highest level in over two decades.
In Australia, the ten-year yield jumped to 5.44%, up sharply from the year-to-date low of 4.66%. It has moved to its highest level since 2011, and much higher than the pandemic low of 0.550%.
AUD/USD Technical Analysis
The AUD/USD pair has slipped in the past few days as the US dollar has gained steam ahead of the FOMC decision. It dropped from a high of 0.7237 earlier this month to the current 0.7130. It has already slipped below the ascending trendline that connects the lowest swings since August 3.
The Relative Strength Index (RSI) has dropped below the neutral level of 50, suggesting more downside is possible. On the other hand, the pair has remained above the 50-day Exponential Moving Average (EMA).
As such, this may be a sign that the pair is about to bounce back, which may happen since the Fed rate hike has been priced in. If this happens, the next level to watch will be at 0.7200. A drop below the 50-day moving average will invalidate the bullish outlook.
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