Bearish view

• Sell the AUD/USD pair and set a take-profit 0.6130.
• Add a stop-loss at 0.6350.
• Timeline: 1-2 days.

Bullish view

• Buy the AUD/USD pair and set a take-profit at 0.6350.
• Add a stop-loss at 0.6130.

The AUD/USD exchange rate dropped sharply as odds of interest rate cuts by the Reserve Bank of Australia (RBA) rose. It dropped from this week’s high of 0.6328 to a low of 0.6225 also after the Federal Reserve interest rate decision.

Australia inflation data and Fed decision

The AUD/USD pair retreated sharply after a report by the Australian Bureau of Statistics (ABS) published encouraging consumer inflation data. The data showed that the weighted mean consumer inflation data dropped from 3.7% in Q3 to 3.4% in Q4, lower than the median estimate of 3.5%.

More data showed that the trimmed mean CPI fell from 3.6% to 3.2% in the last quarter. The headline CPI fell from 2.8% to 2.4%. These numbers are moving in the right direction even as they remained above the 2.0% RBA target.

The data means that the RBA will likely start cutting interest rates as soon as in its February meeting. That’s because, other than the Bank of Japan, it has been the only developed country central bank not to cut interest rates in the current cycle.

The AUD/USD pair also reacted to the latest Federal Reserve interest rate decision. In its first monetary policy meeting of the year, the Fed decided to leave rates unchanged at 4.50% as most analysts expected.

The bank defied Donald Trump who has called for rates to come down further. Officials anticipate that inflation will remain higher for longer in the coming months, partly because of Trump’s policies like mass deportations and tariffs. The recent fires in Los Angeles will also contribute to higher prices in the coming months. Housing and insurance will be some of the most affected industries.

AUD/USD technical analysis

The daily chart shows that the AUD/USD pair retreated to a low of 0.6215 after the Fed decision. It retreated from this week’s high of 0.6330, an important level since it was the lowest swing on August 5.

The pair has remained below the 50-day and 25-day moving averages, while the momentum indicator has drifted downwards. It has also dropped below the bottom of trading range of the Murrey Math Lines indicator.

Therefore, the pair will likely continue falling as hopes of RBA rate cuts rise. The next point to watch will be at 0.6130, its lowest point this year.

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