AUD/USD poised for potential drop to 0.6400 ahead of RBA decision. Bearish breakout signals, with stops at 0.6600, buys at 0.6525. Watch for impacts from US data and RBA's policy direction.

Bearish view

• Sell the AUD/USD pair and set a take-profit at 0.6400.
• Add a stop-loss at 0.6600.
• Timeline: 1-2 days.
•  

Bullish view

• Set a buy-stop at 0.6525 and a take-profit at 0.6600.
• Add a stop-loss at 0.6450.

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The AUD/USD exchange rate plunged hard after the recent economic numbers led many traders to predict that the Fed and Reserve Bank of Australia (RBA) will diverge on their policies. The pair plunged to the psychologically important support at 0.6500, its lowest level since November 20th.

Fed and RBA potential divergence

The AUD/USD pair made a strong bearish breakout after Australia published an encouraging inflation report. Data by the Australia Bureau of Statistics (ABS) showed that the headline Consumer Price Index (CPI) plunged to a two-year low of 4.1% in the final three months of the year. This decline was steeper than the median estimate of 4.3%.

The drop means that inflation is heading in the right direction, a move that could impact Tuesday’s RBA decision. In it, most economists expect the bank to leave rates unchanged as it has done in the past few meetings. The bank will also likely end the notion that it will hike interest rates this year since inflation is falling.

The opposite situation is happening in the US, where the Fed has every reason to maintain a hawkish tone. For one, recent economic numbers have painted a picture of an economy that is growing.

For example, the latest NFP numbers revealed that the unemployment rate remained unchanged at 3.7% in January while wage growth accelerated. The average hourly earnings figure rose by 4.5% in January, better than the expected 4.1%. Further, the economy created 353k jobs during the month, beating what analysts were expecting.

These numbers came two days after the Fed made its first decision of the year. The bank left rates unchanged and hinted that it will not cut rates in March. Some analysts see no reason why the Fed should cut soon since the economy is still robust.

The next key important AUD/USD news will be the upcoming US ISM non-manufacturing PMI report and a statement by Raphael Bostic.

AUD/USD technical analysis

The AUD/USD pair made a strong bearish breakout after the mixed data from the US and Australia. It moved below the lower side of the bearish flag pattern, which is one of the most bearish signs in the market. The pair has dropped below the 50-period and 25-period moving averages.

It also retreated below the key support at 0.6525, its lowest swing on January 17th and the lower side of the bearish flag pattern. It was also its lowest point on December 7th. The MACD has moved below the neutral point. Therefore, the outlook for the pair is bearish, with the next point to watch will be the psychological point at 0.6400.

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