Australian Dollar Outlook Ahead of RBA and BOJ: AUD/USD, AUD/JPY, EUR/AUD

The Australian dollar led major FX gains on Monday as hopes of a US-Iran peace deal boosted risk appetite. With the RBA and BOJ both set to announce policy decisions, traders now face a critical test for AUD/USD, AUD/JPY and EUR/AUD.

 

View related analysis:

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• Euro Technical Analysis: EUR/USD, EUR/JPY, EUR/AUD

 

Australian Dollar Forecast: AUD/USD, AUD/JPY and EUR/AUD Ahead of RBA, BOJ

Australian Dollar Benefits from Middle East Peace Hopes

The Australian dollar was the strongest FX major on Monday thanks to the risk-on tone driven by hopes of a peace deal between the US and Iran. Those hopes have yet to be derailed by fresh escalation in the conflict, unlike previous reported agreements. That has helped Wall Street indices hold on to their gains and even saw the Dow Jones print an intraday record high.

 

BOJ Expected to Hike, But Will It Support the Yen?

We have two central bank meetings today, although it is debatable how much scope there is for a genuine surprise. The BOJ is expected to deliver a 25bp hike, taking its policy rate to a 31-year high of 1%. The key question is whether it will be accompanied by sufficiently hawkish guidance to justify short covering on the Japanese yen, given speculative traders had amassed record gross-short exposure according to the latest Commitment of Traders (COT) report. I will not hold my breath, but it never pays to drop your guard where the BOJ is concerned.

 

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RBA Set for Hawkish Hold

The RBA is widely expected to leave rates unchanged. While there is a reasonable case that rates have peaked following three consecutive hikes, I doubt the Bank has the appetite to signal that yet, as doing so could undermine much of its work to date. Despite softer employment and growth data, policymakers can point to inflation remaining too high and the fact that a Middle East peace deal is not yet a done deal. That paves the way for a hawkish hold and leaves room for another leg higher in Australian dollar pairs.

That said, I still see scope for AUD/USD to dip towards 0.6900, AUD/JPY to retreat further, and EUR/AUD to extend its rebound once the current pullback is complete.

Source: RBA, LSEG

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Australian Dollar Technical Analysis

AUD/USD Technical Analysis: Australian Dollar vs US Dollar

The retracement higher for th Australian dollar extended on Monday, though stopped just shy of the 71c handle. The fact that over a third of the day’s range was upper wick suggests a hesitancy from the bull camp to break that level. Also note that it dits near the 50 and 20-day EMAs, so  71c marks a decent level of resistance for now.

Still, a hawkish hold form the RBA could at least help AUD/USD reach for 71c today, though we may also need a signed US-Iran deal for it to break materially higher.

Ultimately, I have not written of the potential for AUD/USD to turn lower when the current upswing is complete and head of 69c. But for now we’re trying to decipher how much juice bulls have left in their tank, and if a swing high will form around 71c or nearer the high-volume node (HVN) near 0.7162.

Source: ICE, TradingView

 

 

AUD/JPY Technical Analysis: Australian Dollar vs Japanese Yen

The rebound from 112 came almost like clockwork. I had a hunch it could perform well after AUD/JPY formed a bullish engulfing candle just above the 112 handle following a four-day decline. A rickshaw man doji formed on the weekly chart and momentum is now pointing higher. If the RBA delivers a hawkish hold, as I expect, while sentiment remains buoyant following the Middle East peace deal, AUD/JPY should be able to extend its gains in the near term.

The 1-hour chart shows a solid uptrend, although resistance has emerged around the May VPOC. Regardless, I suspect bulls will continue to favour buying dips in the current environment.

The 114.00 handle is the next obvious target for bulls if prices break above 113.50. A bull flag is forming on the 1-hour chart, although traders may also look to buy dips towards Thursday's VPOC and the 50-day EMA around 113.00 in anticipation of another leg higher.

Source: ICE, TradingView

 

 

 

EUR/AUD Technical Analysis: Euro vs Australian Dollar

The weekly chart shows EUR/AUD amid a retracement higher within its broader bearish trend, having established support around the March lows with a double bottom. It may have further upside potential in the coming weeks, although last week's upper wick warns that the rebound could be losing momentum.

The daily chart shows EUR/AUD has retraced lower for a third consecutive day, although the pace of the decline has not been excessive. With the prospect of a hawkish hike still on the table, there may be scope for further losses. However, my bias for now is to seek a swing low in anticipation of the next move higher. The daily RSI (2) is not yet oversold, but it is approaching that threshold.

Note that the 50-day EMA and monthly R1 pivot are currently holding as support. Below that, the 61.8% Fibonacci retracement level and weekly S1 pivot sit just above 1.6300 and could provide additional support. If a deeper pullback unfolds, I would still be looking for a swing low closer to the monthly pivot point. For now, however, I suspect any retracement will remain relatively shallow, given the strength of the initial rally from the 1.6200 handle.

Source: ICE, TradingView

 

 

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-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge