Bearish view

• Sell the AUD/USD pair and set a take-profit at 0.6530.
• Add a stop-loss at 0.6700.
• Timeline: 1-2 days.

Bullish view

• Buy the AUD/USD pair and set a take-profit at 0.6700.
• Add a stop-loss at 0,6530.

(Click on image to enlarge)

The AUD/USD pair retreated after last week’s hawkish Federal Reserve decision. It dropped to the important support at 0.6600 ahead of the upcoming Reserve Bank of Australia (RBA) interest rate decision.
 

RBA meeting ahead

The RBA will start its two-day meeting later on Monday and then deliver its decision on Tuesday. Based on the recent economic numbers and RBA officials’ statements, the bank is expected to leave rates unchanged at 4.35%.

However, there are signs that officials will warn of a possibility that the bank will hike rates by 0.25% if inflation remains strong. The most recent data showed that the headline Consumer Price Index (CPI) rose to 3.6% in April.

Another report revealed that the country’s inflation rose by 1% in Q1, higher than the expected 0.8%. Therefore, the bank could opt for another rate hike to slow inflation.

Like in the US, the RBA is battling with a state of reflation, where high inflation is accompanied by slow economic growth. A recent report by the Bureau of Statistics showed that the economy rose 0.1% in Q1 and by 1.1% on a YoY basis.

Stagflation is one of the toughest things for a central bank to deal with because of the unintended consequences. A rate hike could, in theory, slow the economy while a cut could stimulate inflation.

The RBA will likely point to higher rates for longer since a rate hike could hurt most Australians who are battling with a cost of living crisis. Mortgage rates and rental prices have jumped in most cities, especially in Sydney.

The AUD/USD pair has also pulled back after the hawkish Fed decision. In it, the officials warned that the bank will deliver just one hike this year but only if inflation continues moving towards the 2% target. Fed’s John Williams and Patrick Harker will be the key officials to talk on Monday.
 

AUD/USD technical analysis

The AUD/USD exchange rate drifted downwards ahead of the RBA decision. On the daily chart, it has moved to the 25-day moving average and the Woodie pivot point. It has also formed a descending channel while the MACD and Relative Strength Index (RSI) have formed a downward trend.

Therefore, the pair’s outlook is neutral ahead of the RBA meeting, with the key support and resistance levels to watch being at 0.6530 (S1) and 0.6700, its highest point last week.

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