Australian Dollar Fundamental Backdrop

The Australian dollar gathered momentum in early trading this morning after the Reserve Bank of Australia (RBA) released its meeting minutes highlighting the need for more aggressive tightening measures. The possibility of a 40bps rate hike was argued within the current climate of rising inflation, tight labor market, and relatively low-interest rates. For the period ending in December 2022, money markets are pricing in hikes cumulative to 251bps which trumps even the Fed’s 191bps at this point. Any dovish disappointments from the RBA could significantly hinder the AUD against the USD.

RBA Interest Rate Probabilities

Source: Refinitiv

The U.S. dollar also lost traction after the COVID-19 situation in China recovered, further supporting the commodity-linked AUD. On the economic calendar, U.S. retail sales along with Fed Chair Jerome Powell’s speech dominate headlines which may hamper today’s initial gains.

AUD/USD Economic Calendar

Source: DailyFX economic calendar

AUD/USD Technical Analysis

AUD/USD Daily Chart

(Click on image to enlarge)

Chart prepared by Warren Venketas, IG

As mentioned in my previous AUD/USD analysis, the bullish divergence occurrence has come to fruition. Price action now holds above the psychological 0.7000 level but may not be the reversal many bulls are waiting for. Caution should be observed during this period as fundamentals remain uncertain.

Key resistance levels:

• 0.7100
• 20-day EMA (purple)

Key support levels:

• 0.7000

IG Client Sentiment Data: Bullish

IGCS shows retail traders are currently LONG on AUD/USD, with 70% of traders currently holding long positions (as of this writing). At DailyFX we typically take a contrarian view of crowd sentiment however, recent changes in long and short positioning results in an upside bias.