AUD/USD surges ahead of RBA decision

Amid this week’s busy and potentially market-moving schedule dominated by Thursday’s UK general election and European Central Bank policy decision, a key event likely to affect the Australian dollar may well have been overlooked. The Reserve Bank of Australia (RBA) will release its own rate decision and statement on Tuesday, and the Australian dollar has been rising sharply against the US dollar (on the back of a weaker than expected US jobs report on Friday) in the few days running up to this RBA release.

In the days ahead of last month’s RBA meeting, AUD/USD had also been rising prior to the announcement of rates being kept steady in conjunction with a mixed-to-optimistic statement by the central bank. Shortly after that May decision announcement, however, AUD/USD proceeded to drop sharply within its then-prevailing downtrend channel. The RBA had hinted in that May statement that it much preferred a weaker Australian dollar.

For Tuesday’s release, the RBA is again expected to keep rates steady at 1.50%, where it has remained since it was lowered by 25 basis points in August of last year. As always, however, the central bank’s depiction of the Australian economy and inflation, along with any hints about its policy trajectory going forward, should have a significant effect on the Australian dollar.

On the US dollar side, a weaker than expected US jobs report on Friday pressured the US dollar as questions arose regarding the future path of Fed interest rate hikes after the next FOMC meeting in mid-June. Although the probability of a Fed rate hike during this mid-June meeting remains very high – above 95% according the CME’s FedWatch tool – doubts about the Fed’s intentions after June, in the face of weakening employment data, could continue to weigh on the US dollar over the longer-term.

Amid these fundamental dynamics, AUD/USD’s rise in the past few days has once again approached major resistance around the 0.7500 level. This rise comes after the currency pair bounced off the upper border of a descending trend channel late last week. If the 0.7500 resistance level holds in the aftermath of the RBA decision, AUD/USD could continue its downtrend since mid-March, with the next major downside target around the key 0.7300 support objective. Any major breakout above 0.7500 resistance, however, could prompt the currency pair to reach higher towards the 0.7600 resistance level.

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