Australian dollar Expectation: Neutral
- AUD returns to range after missing highs
- of USD The Fed’s hawkish rhetoric has regained the upper hand
- The bond market and weekly charts may tell you something
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The Australian dollar fell from a four-month high last week as the Fed resumed a more hawkish tone while domestic rates markets were not expecting a rate hike by the RBA in July.
While rate tightening may not materialize at the next RBA monetary policy meeting, the market expects another 50 basis points of rate hikes by the end of the year, bringing the target cash rate to 4.6%.
As many central banks are now arguing, each future decision will depend on data. Australia’s second-quarter CPI will be released on July 26 and will be a big focus for markets looking to get a handle on the deliberations at the RBA’s August meeting.
Federal Reserve Chairman Jerome Powell will address a panel at the European Central Bank (ECB) Forum on Central Banks this Wednesday.
Australia’s yield curve reversed last week for the first time since the global financial crisis. Three-year yields were up to five basis points higher than 10-year bonds.
If the yield curve flattens and then reverses, the bond market suggests that the economy may slow down at some point down the road.
Of course, this is what the RBA is trying to achieve to curb dangerously high inflationary pressures.
RBA Governor Philip Lowe is laying out a plan to take the narrow path of keeping prices in check while sustaining economic growth and avoiding a recession. In the bond market, we see increasing risks to the successful implementation of this plan.
Looking ahead, geopolitics could affect the market over the next week given the evolving situation in Russia. The AUD/USD could get caught in a barrage and become vulnerable if the swings in risk sentiment intensify.
Australian government bond yield curve – 3s 10s
Charts created with TradingView
Australian dollar/USD technical analysis
AUD/USD rose to highs just below 69 cents last week, not far from its all-time high of 0.6920. These levels could provide resistance if the rally resumes.
Further up, the resistance line could be at the previous peaks of 0.7011 and 0.7030 before the cluster zone in the 0.0.7137 – 0.7157 area.
A nearby resistance line could be at the breakpoint at 0.6710 ahead of a potential resistance zone in the 0.6800 – 0.6820 area.
Support is likely at the breakpoints of 0.6574 and 0.6565 or the late May low of 0.6458.
Further down, support is likely at the previous low of 0.6387 and the nearby Fibonacci level of 0.6381. The latter is the 78.6% Fibonacci retracement of the movement from the low of 0.6170 to the peak of 0.7158.
Charts created with TradingView
A nearby resistance line could be at the breakpoint at 0.6710 ahead of a potential resistance zone in the 0.6800 – 0.6820 area.
Support is likely at the breakpoints of 0.6574 and 0.6565 or the late May low of 0.6458.
Weekly Chart – AUD/USD Technical Analysis
The weekly chart reveals that the bearish entrapment candlestick formation was created by price action. It could suggest that a reversal could occur and bearish momentum could develop.
Charts created with TradingView
— By Daniel McCarthy, DailyFX.com Strategist
Please contact Daniel. @DanMicCarthyFX on Twitter
