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AUD/USD fails to test January high ahead of RBA rate decision

By on February 24, 2022 0

Australian Dollar Talking Points

AUD/USD breaks series of higher highs and lows at the start of the week as the increase Russia-Ukraine tensions appear to be spurring a flight to safety, and the exchange rate could consolidate ahead of the Reserve Bank of Australia’s (RBA) next interest rate decision on March 1, as it fails to test January high (0.7314).

AUD/USD fails to test January high ahead of RBA rate decision

AUD/USD extends decline from monthly high (0.7284) as greenback appreciates against all major peers, and further data printouts from the US could keep the rate going currency under pressure as the Federal Reserve’s preferred gauge for inflation is expected to rise for the fifth consecutive month.

The U.S. Personal Consumption Expenditure (PCE) price index update could influence AUD/USD as the core reading is expected to widen to 5.1% from 4.9% yoy in December , which would mark the highest reading since 1983, and another rise could generate a bullish reaction from the US Dollar as evidence of lingering inflation prompts the Federal Reserve to adjust its exit strategy.

As a result, AUD/USD could consolidate for the remainder of the month as the Federal Open Market Committee (FOMC) is on track to implement higher interest rates in 2022, but the decision on RBA rate could influence the short-term outlook for the exchange rate. if the Central Bank adjusts the forward guidance of monetary policy.

Image from the DailyFX Economic Calendar for Australia

A significant change in RBA language could support the Australian dollar as the central bank recognizes that “inflation accelerated faster than the Bank had expected,” and it remains to be seen whether the governor Phillip Lowe and Co. will prepare Australian households and businesses for imminent regime change as the central bank pledges to “not raise the cash rate until actual inflation is sustainably within the 2-3% target range.”

In turn, the RBA can stick to a wait-and-see approach because “tThe board is ready to be patient as it monitors developments in the various factors affecting inflation in Australiaand more from the central bank could undermine the recent rally in AUD/USD as market participants brace for higher US interest rates.

Until then, AUD/USD may trade within a defined range as fails to test the January high (0.7314)but a further decline in the exchange rate could fuel the recent reversal in retailer sentiment, similar to the behavior seen in the previous year.

Image of IG client sentiment for the AUD/USD rate

the IG Customer Opinion Report shows 57.92% of traders are currently long fillet AUD/USD, with the ratio of long to short traders upright at 1.38 to 1.

The number of net long traders is 16.38% higher than yesterday and 2.32% higher than last week, while the number of net short traders is 39.95% lower than yesterday. yesterday and 31.67% lower than last week. Rising net buying interest had fueled the reversal in retailer sentiment, with 51.55% of traders net long on AUD/USD last week, while the decline in net short comes as the exchange rate rebounds rapidly from a new weekly low. (0.7095).

That said, AUD/USD may face some headwinds ahead of the RBA’s next rate decision as a further rise in the US PCE price index puts pressure on the FOMC to adjust its exit strategy, and the advance of the The January low (0.6968) could turn out to be a correction of the general trend, as the exchange rate appears to reverse ahead of the yearly high (0.7314).

AUD/USD daily rate chart

Image of daily AUD/USD rate chart

Source: Commercial view

  • Keep in mind that AUD/USD broke the November 2020 low (0.6991) earlier this year after failing to hold above the 50-day SMA (0.7176), but lack of momentum to test the 0.6940 region (78.6% expansion) pushed the exchange rate lower above the moving average as Relative Strength Index (RSI) diverge with the price.
  • AUD/USD seemed to be on track to test January high (0.7314) as the exchange rate hit a new weekly high (0.7284), but the lack of momentum to clear the yearly opening range pushed the exchange rate back towards the Fibonacci overlap around 0.7130 (61.8% retracement) to 0.7180 (61.8% retracement)with a break/close below the Region from 0.7070 (61.8% expansion) to 0.7090 (78.6% retracement) carrying the February low (0.7033) on the radar.
  • Failure to defend the January low (0.6968) opens the region of 0.6940 (78.6% expansion), with the next area of ​​interest around 0.6770 (100% expansion) to 0.6820 (23.6% retracement).
  • At the same time, the lack of momentum for break/close below 0.7070 (61.8% expansion) to 0.7090 (78.6% retracement) region may keep AUD/USD within a defined range, with a move above the 0.7260 zone (38.2% expansion) leading into January high (0.7314) back on the radar.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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