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AUD/USD Bull-Flag Formation Unfolds Ahead of NFP, RBA Rate Decision

AUD/USD Bull-Flag Formation Unfolds Ahead of NFP, RBA Rate Decision

David Song, Strategist

Talking Points:

- AUD/USD Eyes November High; Bull-Flag Formation Unfolds Following Record Trade Surplus.

- GBP/USD to Track Late-2016 Range as BoE Caps Inflation Outlook.

DailyFX Table

Currency

Last

High

Low

Daily Change (pip)

Daily Range (pip)

AUD/USD

0.7679

0.7696

0.7578

93

118

AUD/USD Daily

AUD/USD Daily Chart

Chart - Created Using Trading View

  • AUD/USD may continue to retrace the decline from the November high (0.7778) as a bull-flag formation appears to be playing out after Australia posted the largest trade surplus since the series began in 1971; will keep a close eye on the Relative Strength Index (RSI) as it flirts with overbought territory, with a definitive move above 70 raising the risk for a further advance in the exchange rate as the bullish momentum gathers pace.
  • Ahead of the RBA’s first policy meeting for 2017, the U.S. Non-Farm Payrolls (NFP) report may curb the recent advance in the aussie-dollar as the economy is anticipated to add another 175K jobs in January, but a slowdown in Average Hourly Earnings may further dampen the case for a March rate-hike and produce near-term headwinds for the greenback as the Federal Open Market Committee (FOMC) warns ‘market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance.
  • Even though the Reserve Bank of Australia (RBA) is widely expected to retain the current policy at the February 7 interest rate decision, the improvement in the terms of trade may encourage Governor Philip Lowe and Co. to adopt a hawkish outlook for monetary policy, as the central bank argues ‘globally, the outlook for inflation is more balanced than it has been for some time;’ nevertheless, more of the same from the RBA may lead to a limited market reaction, with the broader outlook for AUD/USD still tilted to the downside as Fed Fund Futures continue to highlight a greater than 60% probability for a June rate-hike.
  • With the RSI pushing its way into overbought territory, the topside targets remain favored over the days ahead, with the next hurdle coming in around 0.7730 (61.8% retracement) to 0.7740 (78.8% expansion) followed by 0. 7770 (61.8% expansion) to 0.7778 (November high).

Currency

Last

High

Low

Daily Change (pip)

Daily Range (pip)

GBP/USD

1.2547

1.2706

1.2537

112

169

GBP/USD Daily

AUD/USD Bull-Flag Formation Unfolds Ahead of NFP, RBA Rate Decision

Chart - Created Using Trading View

  • The bearish market reaction to the Bank of England (BoE) interest rate decision may open up the late-2016 range for the British Pound as GBP/USD makes another failed attempt to close above the Fibonacci overlap around 1.2630 (38.2% expansion) to 2.12680 (50% retracement); the unanimous vote to retain the current policy keeps the broader outlook for sterling tilted to the downside especially as the U.K.’s departure from the European Union (EU) clouds the economic outlook for the region.
  • Even though the Governor Mark Carney and Co. sees faster growth over the policy horizon, it seems as though the central bank is in no rush to remove its highly accommodative policy as the inflation outlook was largely in-line with the November forecast, with officials still projecting inflation to peak at an annualized 2.8% in the second quarter of 2018; the wait-and see approach by both the BoE & Fed may foster range-bound conditions throughout the first quarter of 2017 as recent remarks from Chair Yellen and Co. tame expectations for a March rate-hike.
  • As GBP/USD carves a bearish harami (outside-day) candle, the downside targets will be on the radar going into the first full-week of February, with a break/close below 1.2460 (61.8% expansion) to 1.2490 (38.2% retracement) opening up the next region of interest around 1.2370 (50% expansion) followed by 1.2270 (23.6% retracement).

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Read More:

DailyFX Roundtable: BoJ, Fed and BoE Preview

GBP/USD to Take Cues From FOMC/BoE Interest Rate Outlook

Technical Weekly: Is USD/CHF the Tell?Gold Prices Back Below 1200- Here’s the Game Plan

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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