AUD/USD snap back under review - RBA on tap

Australian Dollar Outlook

AUD/USD remains under pressure following the 517K rise in US Non-Farm Payrolls (NFP), and the Reserve Bank of Australia (RBA) interest rate decision may fuel the recent decline in the exchange rate if the central bank signals a looming change in regime.

AUD/USD snap back under review – RBA on tap

AUD/USD carves a series of lower highs and lows after trading to a fresh yearly high (0.7158) last week, and another 25bp rate hike from the RBA may do little to prop up the Australian Dollar as the central bank acknowledges that ‘there had already been a material increase in the cash rate in a short period of time.’

FOREX.com Economic Calendar

As a result, the RBA may adjust its forward guidance for monetary policy as the ‘Board is seeking to keep the economy on an even keel,’ and Governor Philip Lowe and Co. may look to pause its hiking cycle over the coming months as the central bank emphasizes that ‘a range of options for the cash rate could be considered again at upcoming meetings in 2023.’

Australian Bureau of Statistics (ABS) Measure of Consumer Price Inflation

However, the latest update to Australia’s Consumer Price Index (CPI) may put pressure on the RBA to implement a more restrictive policy as the headline reading for inflation climbs to 7.8% from 7.3% per annum in the third quarter of 2022 to mark the highest reading since 1987. In turn, evidence of persistent price growth may keep the RBA on its current course as the ‘Board’s priority is to re-establish low inflation and return inflation to the 2 to 3 per cent target range over time.’

With that said, a 25bp RBA rate hike along with a hawkish forward guidance may generate a bullish reaction in AUD/USD as market participants brace for higher interest rates in Australia, but indications of an imminent change in regime may drag on the exchange rate should Governor Lowe and Co. show a greater willingness to winddown the hiking-cycle.

Australian Dollar Price Chart – AUD/USD Daily

Chart Prepared by David Song, Strategist; AUD/USD on TradingView

• AUD/USD tests the 50-Day SMA (0.6855) for the first time since November as it carves a series of lower highs and lows from the yearly high (0.7158), but failure to break/close below the 0.6820 (23.6% Fibonacci retracement) to 0.6870 (38.2% Fibonacci retracement) region may curb the recent decline in the exchange rate as it appears to be responding to the positive slope in the moving average.
• AUD/USD may snap the bearish price action as it manages to hold above the moving average, with a close above the 0.7090 (50% Fibonacci retracement) to 0.7140 (23.6% Fibonacci expansion) opening up the June 2022 high (0.7283).
• At the same time, failure to hold above the moving average may push AUD/USD towards the 0.6820 (23.6% Fibonacci retracement) to 0.6870 (38.2% Fibonacci retracement) area, with a move below the 200-Day SMA (0.6809) raising the scope for a run at the January low (0.6688).

--- Written by David Song, Strategist