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Fundamental Forecast for Australian Dollar: Bearish

The Reserve Bank of Australia’s (RBA) first interest rate decision for 2018 may do little to halt the recent selloff in AUD/USD, with the pair at risk for further losses as it snaps the upward trend carried over from late-2017.

The RBA may merely attempt to buy more time at the February 6 meeting as the fresh updates to the Consumer Price Index (CPI) curb the outlook for inflation, and the central bank may retain the record-low cash rate throughout the first-half of the year as ‘the outlook for household consumption continued to be a significant risk, given that household incomes were growing slowly and debt levels were high.’ At the same time, RBA officials may continue to jawbone the local currency as ‘an appreciating exchange rate would be expected to result in a slower pick-up in domestic economic activity and inflation than currently forecast,’ and more of the same from the central bank may ultimately spark a bearish reaction in AUD/USD as market participants scale back bets for a rate-hike in 2018.

Nevertheless, Governor Philip Lowe and Co. may gradually alter the outlook for monetary policy as the central bank head warns that ‘it is more likely that the next move in interest rates will be up, rather than down,’ and an unexpected batch of hawkish rhetoric may heighten the appeal of the Australian dollar as the central bank prepares to shift gears. Interested in having a broader discussion on current market themes? Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups.

AUD/USD Daily Chart

Wait-and-See RBA Policy to Fuel Bearish AUD/USD Sequence

Downside targets are back on the radar for AUD/USD as both price and the Relative Strength Index (RSI) snap the bullish formations from December after failing to test the 0.8150 (100% expansion) region. Aussie-dollar stands at risk of extending the recent series of lower highs & lows as the momentum indicator falls back from overbought territory and flashes a textbook sell-signal, with a close below the 0.7930 (50% retracement) to 0.7940 (61.8% retracement) region opening up the next area of interest around 0.7850 (38.2% retracement) to 0.7860 (61.8% expansion). Interested in trading? Review the ‘Traits of a Successful Trader’ series on how to effectively use leverage along with other best practices that any trader can follow.

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