The recent advance in AUD/USD seems to have stalled ahead of the September-high (0.7315) as the Federal Reserve appears to be on track to further normalize monetary policy, but recent price action keeps the topside targets on the radar as the exchange rate preserves the string of higher highs & lows from earlier this week.

AUD/USD HOLDS BULLISH SERIES AHEAD OF RBA STATEMENT ON MONETARY POLICY

AUD/USD pullback from the weekly-high (0.7303) even as the Federal Open Market Committee (FOMC) keeps the benchmark interest rate on hold as the central bank ‘expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term’.

The comments suggest the Fed will continue to pursue its hiking-cycle as ‘economic activity has been rising at a strong rate,’ and Fed Fund Futures may continue to reflect expectations for a 25bp rate-hike at the last meeting for 2018 as ‘risks to the economic outlook appear roughly balanced’.

The hawkish forward-guidance for monetary policy may continue to produce headwinds for AUD/USD as Chairman Jerome Powell & Co. show no interest in abandoning the hiking-cycle, and the diverging paths cast a long-term bearish outlook for Aussie-dollar as the official cash rate (OCR) in Australia sits at a record low.

In turn, the Reserve Bank of Australia’s (RBA) quarter Statement on Monetary Policy (SMP) may do little to prop up the local currency as Governor Philp Lowe & Co. retain a wait-and-see approach, but the recent pickup in volatility has spurred a material shift in retail sentiment as traders now appear to be fading the recent strength in AUD/USD.

The IG Client Sentiment Report now shows 50.6% of traders are net-long AUD/USD versus 70.5% during the previous week, with the ratio of traders long to short at 1.03 to 1. The number of traders net-long is 2.0% lower than yesterday and 18.2% lower from last week, while the number of traders net-short is 10.8% higher than yesterday and a stunning 45.8% higher from last week.

The sharp jump in net-short interest warrants attention as the recent rebound in AUD/USD appears to have stalled ahead of the September-high (0.7315), but a further accumulation in net-short interest may ultimately provide a contrarian view to crowd sentiment as the exchange rate starts to threaten the downward trend from earlier this year.

AUD/USD DAILY CHART

(Click on image to enlarge)

• Recent series of higher highs & lows raises the risk for a larger correction in AUD/USD especially as the exchange rate comes up against trendline resistance, with the Relative Strength Index (RSI) highlighting a constructive outlook as the oscillator extends the bullish formation carried over from the previous month.
• In turn, the Fibonacci overlap around 0.7320 (50% expansion) to 0.7340 (61.8% retracement) sits on the radar followed by the 0.7400 (38.2% expansion) handle.
• However, lack of momentum to test the September-high (0.7315) may spur a move back towards the 0.7170 (23.6% expansion) to 0.7180 (61.8% retracement) region, with the next region of interest coming in around 0.7090 (78.6% retracement) to 0.7110 (78.6% retracement).