AUD/USD forecast takes a boost by hawkish RBA and US dollar weakness

The AUD/USD has been catching my attention lately which is partly why we featured it as the Currency Pair of the Week on Monday. We were expecting it to climb back heading into the Reserve Bank of Australia meeting, and so it proved. The RBA kept interest rates unchanged overnight but struck a moderately hawkish tone in the statement and press conference, causing the Aussie to climb. Governor Michele Bullock highlighted concerns about inflation stickiness and that seems to have been the trigger behind the hawkish repricing of RBA rates. With the US dollar meanwhile extending its slide, this has helped to push the pair back above 0.6600 handle. We will maintain a bullish AUD/USD forecast heading deeper into the week, and ahead of a potential US government shutdown.

 

RBA’s hawkish hold gives AUD/USD forecast a boost

 

As mentioned, the Reserve Bank of Australia kept rates on hold, as everyone expected. But it wasn’t a dull decision — far from it. The statement came across as a hawkish hold, with the key line being that underlying inflation has slowed. The problem is that the pace of that slowdown is itself slowing, and that’s raised a few eyebrows. It suggests the RBA may not be in any rush to cut rates, at least not in the aggressive fashion markets had been hoping for.

 

That shift was quickly priced in. Markets are now pricing in only 10bp of easing for the November meeting and 13bp by December, meaning the that the odds of a cut this year is now a coin-flip.

 

Naturally, the Aussie dollar has firmed on the back of it. The AUD/USD started the week falling some 30 pips below 0.6600, but it has already pushed 20 pips north of this handle. The next level to watch now is 0.6625 — last week’s high, which was being tested at the time of writing. If we get above there, it opens up a run towards the late-September highs nearer 0.6607.

 

 

 

US shutdown risks and soft data keep dollar bulls at bay

 

Meanwhile, the US government looks set for a shutdown at midnight. It’s looking more likely by the hour, and if it happens, we’re staring at delays to some of the key economic data releases. That makes the private-sector surveys, and in particular tomorrow’s ADP jobs report, all the more important. With a shutdown in play, ADP could end up being the freshest look we get at the labour market in the near term.

 

For today, the focus was on the JOLTS job openings survey, with expectations for little change. However, it showed a bit of improvement to 7.23m from 7.18m the month before. Nonetheless, the US dollar fell further, possibly because of the fat today’s other data releases were soft. Indeed, the Conference Board’s consumer confidence figures, which were seen ticking lower, were confirmed, but the drop was bigger than expected at 94.2 vs. 96.0 eyed and 97.8 previous. Today’s other data releases was the Chicago PMI, which also disappointed at 40.6 vs. 43.3 expected, and down from 41.5 previously.

 

Technical AUD/USD forecast: Aussie breaks bull flag resistance

 

The AUD/USD has been carving out a series of higher highs and higher lows in recent months, without making any major headlines. Its advance has been more restrained compared to some other major pairs. One of the main drags were the lingering expectation that the RBA could deliver at least one more rate cut before year-end, but now those expectations have been lowered. So, the broader structure is getting more constructive, with the path of least resistance skewed to the upside, keeping my bias tilted bullish on the pair.

 

 

Following the RBA rate decision overnight, the AUD/USD has managed to break above 0.6575 resistance and the trend resistance of the bull flag pattern. Earlier this week, it had dipped into a key support zone between 0.6500 and 0.6550, highlighted in yellow on the chart, which held. Now that we have had a breakout above trendline resistance around 0.6575 area, this serves as another bullish technical signal. It has already now reached initial target at 0.6625, marking the previous week’s high. The next objective is a retest of the recent highs near 0.6707.

 

Only a break below 0.6500 would be deemed a bearish scenario now. If that were to happen then the 200-day moving average, which currently sits in the 0.6392–0.6430 region, could be tested again. But this is not my base case scenario as maintain a bullish AUD/USD forecast.

 

Overall, the outlook remains moderately bullish, underpinned by resilient risk appetite and the recent wave of U.S. dollar weakness.

 

So, to sum up: the Aussie’s drawing strength from a hawkish RBA, and traders are bracing for the fallout from a possible US shutdown. Those two themes are front and centre as we head into the rest of the week, when more US labour market data is released.

 

 

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R