Australian Dollar Forecast: Neutral
- The Australian Dollar has returned to the range after failing on the topside
- The US Dollar regained the ascendency on hawkish Fed language
- The bond market and the weekly chart might be saying something
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The Australian Dollar tumbled from a 4-month peak last week after the Federal Reserve resumed a more hawkish tone at a time when the domestic interest rate market is not expecting a hike from the RBA in July.
While the next RBA monetary policy meeting may not deliver a tightening in rates, the market is looking for another 50 basis point lift by the end of the year that would take the target cash rate to 4.6%.
As many central banks are now making the case, each decision going forward will be data-dependent. Australia’s second quarter CPI will be known on July 26th and will be in sharp focus for the market looking to get clues on the RBA’s deliberations at its August gathering.
This Wednesday, Federal Reserve Chair Jerome Powell will appear on a panel at the European Central Bank (ECB) Forum on Central Banking.
The Australian yield curve inverted for the first time since the GFC last week. The 3-year bond yielded as much as 5 basis points more than the 10-year note.
When yield curves flatten and then invert, the implication from the bond market is that an economic slowdown is possible at some stage further down the track.
Of course this is what the RBA is trying to achieve in order to rein in dangerously high inflationary pressures.
The RBA Governor Philip Lowe has tried to lay out a plan to go down the narrow path of containing prices while maintaining economic growth and avoiding a recession. The bond market is seeing an increased risk of success in delivering on this plan.
Looking forward, the week ahead might see geopolitics play a role in markets given the evolving situation in Russia. If sways in risk sentiment pick up, AUD/USD could be caught in the crossfire and might be vulnerable.
AUSTRALIAN GOVERNMENT BOND YIELD CURVE – 3s 10s
AUD/USD TECHNICAL ANALYSIS
AUD/USD shot to a high just shy of 69 cents last week, not far from a prior peak of 0.6920. Those levels might offer resistance should the rally resume.
Further up, resistance could be at the previous peaks of 0.7011 and 0.7030 ahead of a cluster zone in the 0.0.7137 – 0.7157 area.
Nearby resistance might be at the breakpoint of 0.6710 ahead of a potential resistance zone in the 0.6800 – 0.6820 area.
Support could be at the breakpoints of 0.6574 and 0.6565 or the late May low of 0.6458.
Further down, support may lie at the prior low of 0.6387 and the nearby Fibonacci level of 0.6381. The latter is the 78.6% Fibonacci Retracement of the move from the low of 0.6170 to the peak of 0.7158.
Nearby resistance might be at the breakpoint of 0.6710 ahead of a potential resistance zone in the 0.6800 – 0.6820 area.
Support could be 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 a Bearish Engulfing Candlestick formation was created by the price action. It could suggest that a reversal might be unfolding and bearish momentum may evolve.
— Written by Daniel McCarthy, Strategist for DailyFX.com
Please contact Daniel via @DanMcCarthyFX on Twitter