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AUDUSD Rate Approaches Monthly High with US & China to Meet at G20

Australian Dollar Talking Points

AUDUSD continues to retrace the decline following the Reserve Bank of Australia (RBA) rate cut from earlier this month, and recent price action brings the monthly-high (0.7022) on the radar as the exchange rate extends the series of higher highs and lows from the previous week.

AUDUSD Rate Approaches Monthly High with US & China to Meet at G20

AUDUSD extends the rebound from the monthly-low (0.6832) even though RBA Minutes from this month’s rate decision highlight a dovish forward guidance for monetary policy, and it seems as though the central bank will attempt to buy time at the next meeting on July 2 as Governor Philip Lowe insists that “it’s a legitimate question to ask how effective further monetary easing would be.”

The RBA may revert back to a wait-and-see approach as US President Donald Trump is scheduled to meet with China President Xi Jinping at the Group of 20 (G20) summit scheduled for later this week, and the efforts to nail out a trade agreement may keep the Australian Dollar afloat as it mitigates the downside risk surrounding the Asia/Pacific region.

Image of Fed Fund futures

At the same time, the Federal Open Market Committee (FOMC) appears to be on track to switch gears over the coming months as eight Fed officials project a lower trajectory for the benchmark interest rate, and Chairman Jerome Powell and Co. may come under increased pressure to reverse the four rate hikes from 2018 as President Trump tweets “we need rates cuts, & easing.”

In turn, Fed Fund futures continue to reflect a 100% probability for at least a 25bp reduction at the next interest rate decision on 31, and a growing number of Fed officials may change their tune as the “apparent progress on trade turned to greater uncertainty.”

With that said, speculation for an imminent Fed rate cut may fuel the recent rebound in AUDUSD, but the pickup in volatility appears to be influencing market participation as retail sentiment falls back from an extreme reading.

Image of IG client sentiment for audusd rate

The IG Client Sentiment Report shows65.3% of traders are net-long AUDUSD compared to 75.9% last week, with the ratio of traders long to short at 1.88 to 1. Keep in mind, traders have been net-long since April 18 when AUDUSD traded near 0.7160 even though price has moved 2.2% lower since then.

The number of traders net-long is 8.4% lower than yesterday and 23.0% lower from last week, while the number of traders net-short is 21.7% higher than yesterday and 24.6% higher from last week. The drop in net-long position points to profit-taking behavior as AUDUSD extends the rebound from the monthly-low (0.6832), but the persistent tilt in retail sentiment offers a contrarian view as both price and the Relative Strength Index (RSI) continue to track the bearish trends carried over from late-2018.

Keep in mind, the AUDUSD rebound following the currency market flash-crash has been capped by the 200-Day SMA (0.7107), with the exchange rate marking another failed attempt to break/close above the moving average in April.

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AUD/USD Rate Daily Chart

Image of audusd daily chart

  • The broader outlook for AUDUSD remains tilted to the downside, with the exchange rate still at risk of giving back the rebound from the 2019-low (0.6745) as the wedge/triangle formation in both price and the Relative Strength Index (RSI) unravels.
  • However, the rebound from the monthly-low (0.6832) may continue to gather pace over the coming days as AUDUSD carves a series of higher highs and lows following the failed attempt to close below the Fibonacci overlap around 0.6850 (78.6% expansion) to 0.6880 (23.6% retracement) opens up the 0.6730 (100% expansion).
  • The move back above the 0.6950 (61.8% expansion) to 0.6960 (38.2% retracement) region brings the 0.7020 (50% retracement) pivot on the radar, which largely lines up with the monthly-high (0.7022), with the next area of interest coming in around 0.7080 (61.8% retracement) to 0.7110 (78.6% retracement).
  • Will keep a close eye on the RSI as it comes up against trendline resistance, with a break of the bearish formation raising the risk for a larger correction in the exchange rate.

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.

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