Australian Dollar Outlook: Sentiment Rebounds, AUD/USD Nears Resistance

Australian consumer sentiment rebounded sharply in August after the RBA held rates, although underlying weakness keeps the case for further tightening in check. Meanwhile, AUD/USD remains near 10-week highs but is showing early signs of fatigue around resistance ahead of Thursday’s employment report.

 

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Australian Dollar Gains as Sentiment Rebounds and AUD/USD Nears Resistance

Consumer Sentiment Rebounds After RBA Hold

Consumer sentiment rebounded sharply in August according to the latest Westpac survey. However, the underlying growth picture remains soft enough to support the case for the RBA staying on hold rather than rushing into another hike.

Source: Melbourne Institute, Westpac

 

 

The 6% rise in consumer sentiment saw the index rise from 83.9 to 88.9, and marked its fastest rate of improvement since November. It was also broadly based, with all sub components rising in tandem relative to July. Most notably, views on family finances relative to a year ago rose 12.6% from July, though remain -4.9% on the year. Economic conditions over the next 12 months were also up 5.8%, and time to buy a major household item also rose 8.8%. However, the fact that much of this has arrived after the RBA decided to hold rates has not gone unnoticed. And their hesitancy to commit to any changes soon even has Westpac now questioning a September hike, though they retain a hawkish view  on the central bank overall.

 

RBA Rate Hike Case Loses Momentum

Ultimately, I suspect rates will remain on hold unless we get a major change of circumstances. The RBA have already hiked three times, and with concerns of sustainably higher crude oil prices easing, the acse for another hike has also faltered in my view.

Besides, the headline consumer sentiment index remains below 100 and -9.7% from last years level, meaning there is more pessimism than optimism on the economy – despite its upswing after the RAB delivered a hawkish hold.

 

 

 

AUD/USD Rally Loses Momentum Near Weekly Resistance

The Australian dollar is currently the strongest FX major of the session, leading the way higher against the Swiss franc and Japanese yen. The ASX 200 is also trying to carve out a swing low after a multi-day pullback, which could go on to provide the bullish opportunity I have been patiently waiting for around its 20-day EMA.

 

AUD/USD Bulls Face 0.7140 Resistance as Momentum Stretches

AUD/USD reached a 10-week high on Monday, though half of the day’s gains were handed back by the New York close. While the Aussie is a touch higher today, it seems to be playing around in the lower half of Monday’s upper wick – which to me are early signs of trend exhaustion. Prices are perhaps a touch extended from their 10-day EMA, and with a weekly VPOC at 0.7141, bulls may want to tread with caution. Especially since the US dollar index is defying gravity by holding above its own support levels and printing a bullish hammer on Monday. If the US dollar can bounce, it could at least cap gains on AUD/USD, but for now I am seeking evidence of mean reversion towards the 10-day EMA before reconsidering longs.

Note that Australia’s employment report drops on Thursday, where any signs of weakness could reinforce bets that the RBA’s cash rate has peaked and help AUD/USD pull back over the near term. But with the RBA and Fed likely in a policy stalemate, the Australian dollar could retain the upper hand due to the positive yield differential.

Source: ICE, TradingView

 

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-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge