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Australian Dollar Searches for Support Ahead of China Inflation Report

Australian Dollar Searches for Support Ahead of China Inflation Report

2017-05-09 15:00:00
David Song, Currency Strategist
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Talking Points:

- GBP/USD Outperforms Ahead of BoE’s ‘Super Thursday’ Event; RSI Divergence Taking Shape?

- Australian Dollar Continues to Search for Support Following Dismal Retail Sales, A$29.4B Budget Deficit.

DailyFX Table

Currency

Last

High

Low

Daily Change (pip)

Daily Range (pip)

GBP/USD

1.2936

1.2961

1.2903

5

58

The British Pound outperforms its major counterparts ahead of the Bank of England’s (BoE) ‘Super Thursday’ event, but the slew of U.K. data prints coming out prior to the updated inflation report may drag on GBP/USD should the developments highlight a weakened outlook for growth and inflation. With U.K. Industrial Production & Manufacturing anticipated to contract for the third consecutive month in March, signs of a slowing economy may produce headwinds for Sterling as it encourages the Bank of England (BoE) to preserve the highly accommodative policy stance throughout 2017.

GBP/USD Daily

GBP/USD Daily Chart

Chart - Created Using Trading View

  • The GBP/USD outlook remains constructive as it breaks out of the triangle/wedge formation from earlier this year, and the pair may continue to take out of the topside targets as price & the Relative Strength Index (RSI) extend the bullish formations from earlier this year, with the next topside hurdle coming in around 1.3090 (38.2% retracement) to 1.3120 (78.6% retracement).
  • However, the momentum indicator appears to be deviating with price as the oscillator fails to make a higher-high and falls back from oversold territory; may see a bearish RSI trigger take shape over the coming days especially as it approaches trendline support.
  • With that said, a move below 1.2860 (61.8% retracement) may stoke a larger pullback in the exchange rate, with the first downside region of interest coming in around 1.2630 (38.2% expansion) to 1.2680 (50% retracement) followed by 1.2460 (61.8% expansion) to 1.2490 (38.2% retracement).

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Currency

Last

High

Low

Daily Change (pip)

Daily Range (pip)

AUD/USD

0.7351

0.7399

0.7329

36

70

The Australian dollar struggled to hold its ground following the dismal Retail Sales report, but the AUD/USD exchange rate appears to be bouncing back following 2017-18 budget statement as the coalition government under Malcolm Turnbull unveils a A$75B fiscal stimulus program to boost job/wage growth. Despite projections for A$29.4B deficit, Moody’s Investor Services notes that the budget remains supportive of a AAA-credit rating, and the expansion in public spending may encourage the Reserve Bank of Australia (RBA) to change its tune at its next policy meeting on June 6 as Governor Philip Lowe warns ‘interest rates in Australia will increase’ as the economy continues to transition from the mining boom.

AUD/USD Daily

AUD/USD Daily Chart

Chart - Created Using Trading View

  • Broader outlook for AUD/USD remains tilted to the downside followed the failed attempt to test the November high (0.7778), and the pair remains at risk of giving back the advance from the start of the year as price & the Relative Strength Index (RSI) largely preserve the downward trends carried over from March; will keep a close eye on the oscillator as it approaches oversold territory, with a break below 30 raising the risk for a further decline in the exchange rate as the bearish momentum gathers pace.
  • Keep in mind AUD/USD remains stuck in the 2016-range, with the downside targets still on the radar as the pair continues to come off of the Fibonacci overlap around 0.7730 (38.2% retracement) to 0.7770 (61.8% expansion), with the next region of interest coming in around 0.7290 (50% retracement) to 0.7300 (78.6% retracement) followed by 0.7220 (61.8% retracement) to 0.7240 (61.8% expansion).
  • Nevertheless, data prints coming out of China, Australia’s largest trading partner, may prop up AUD/USD over the next 24-hours of trade as the Consumer Price Index (CPI) is expected to pick up for the second consecutive month to an annualized 1.1% in April, with the first topside hurdle coming in around 0.7450 (38.2% retracement) followed by the Fibonacci overlap around 0.7500 (50% retracement) to 0.7530 (38.2% expansion).

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IG Sentiment
  • Retail trader data shows 36.6% of traders are net-long GBP/USD with the ratio of traders short to long at 1.73 to 1. In fact, traders have remained net-short since April 12 when GBP/USD traded near 1.23716; price has moved 4.5% higher since then. The number of traders net-long is 1.7% higher than yesterday and 17.8% lower from last week, while the number of traders net-short is 3.1% higher than yesterday and 1.8% higher from last week.
  • Retail trader data shows 59.7% of traders are net-long AUD/USD with the ratio of traders long to short at 1.48 to 1. The number of traders net-long is 2.0% higher than yesterday and 42.4% higher from last week, while the number of traders net-short is 3.0% higher than yesterday and 30.4% lower from last week.

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--- Written by David Song, Currency Analyst

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