Australian Dollar Fundamental Backdrop

Last week’s Australian inflation data was echoed by retail sales figures earlier this morning (see economic calendar below) showing little signs of respite from a spending point of view. Australian consumers are sustaining spending habits, adding to higher prices which places the Reserve Bank of Australia (RBA) in an uncomfortable position ahead of tomorrow’s interest rate decision.

Economic Calendar

Source: DailyFX economic calendar

Money market pricing shows roughly 30bps favored for tomorrow's announcement however, a 50bps hike is not off the table in my opinion. Although recessionary fears and a slowing Chinese economy as revealed earlier this morning (contractionary reads on both manufacturing and services PMIs), inflation needs to be reduced. Under normal circumstances, the AUD would have reacted unfavorably to Chinese data along with a stronger USD this Monday but the fact that the Aussie is trading higher against the greenback highlights market's possible hawkish inclination towards tomorrow’s rate decision.

RBA Interest Rate Probabilities

Source: Refinitiv
 

Technical Analysis

AUD/USD Daily Chart

(Click on image to enlarge)

Chart prepared by Warren Venketas, IG

Daily AUD/USD price action is currently testing last week's swing high at 0.6413 which has grown in its significance as a key level. Leading up to the RBA’s announcement I do not expect much in the way of price fluctuation under current circumstances. The Relative Strength Index (RSI) expresses the indecision felt by markets with the indicator favoring neither bullish nor bearish momentum. The decision tomorrow will provide the fundamental catalyst needed to give some directional bias short-term with a hawkish statement likely challenging the 0.6500 psychological handle once more while a dovish release could spark a sell-off towards 0.6200.

Key resistance levels:

• 100-day EMA (yellow)
• 0.6500/50-day EMA (blue)
• 0.6413

Key support levels:

• 20-day EMA (purple)
• 0.6200
   

IG Client Sentiment Data: Bullish

IGCS shows retail traders are currently LONG on AUD/USD, with71% of traders currently holding long positions. At DailyFX we typically take a contrarian view to crowd sentiment but recent changes in long and short positioning result in a short-term upside bias.

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