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AUD/USD Risks Larger Pullback as RBA Ramps Up Verbal Intervention

AUD/USD Risks Larger Pullback as RBA Ramps Up Verbal Intervention

David Song, Strategist

Talking Points:

- GBP/USD Initiates Bullish Sequence Ahead of BoE Rate Decision.

- AUD/USD Risks Larger Pullback as RBA Ramps Up Verbal Intervention.

-DailyFX 3Q Forecasts Are Now Available.

DailyFX Table

Ticker

Last

High

Low

Daily Change (pip)

Daily Range (pip)

GBP/USD

1.3215

1.3245

1.3191

0

54

GBP/USD continues to gain ground ahead of the Bank of England (BoE) interest rate decision, with the near-term outlook tilted to the topside as the pair starts to carve a series of higher highs & lows.

Indeed, the BoE is widely expected to keep the benchmark interest rate at the record-low of 0.25% following the 5 to 3 split in June, but the fresh votes may reveal a growing dissent within the Monetary Policy Committee (MPC) as Governor Mark Carney continues to warns ‘inflation will be above target for a period of time.’

Even though BoE board member Ben Broadbent argues ‘it is a bit tricky at the moment to make a decision,’ a growing number of MPC officials may show a greater willingness to start normalizing monetary policy as Chief Economist Andrew Haldane notes that the central bank needs to ‘look seriously at the possibility of raising interest rates to keep the lid of those cost of living increases.’ Keep in mind, Silvana Tenreyro joins the MPC to replace Kristin Forbes, while Sir David Ramsden is scheduled to begin his tenure in September, and the majority may merely try to buy more time as the recent slowdown in the U.K. Consumer Price Index (CPI) dampens the threat for above-target inflation.

GBP/USD Daily Chart

GBP/USD Daily Chart

Chart - Created Using Trading View

  • Topside targets remain on the radar as GBP/USD initiates a bullish sequence, with the next region of interest coming in around 1.3300 (100% expansion) to 1.3370 (78.6% expansion) followed by 1.3445 (September 2016-high) to 1.3460 (50% retracement).
  • Keeping a close eye on the Relative Strength Index (RSI) as it threatens the bearish formation carried over from May, but the lack of momentum to push into overbought territory raises the risk for a near-term pullback in the exchange rate as price continues to diverge with the oscillator.
  • A move below the overlap around 1.3090 (38.2% retracement) to 1.3120 (78.6% retracement) opens up the 1.2950 (23.6% retracement) region, with the next region of interest coming in around 1.2860 (61.8% retracement, which sits just above the July-low (1.2812).

Ticker

Last

High

Low

Daily Change (pip)

Daily Range (pip)

AUD/USD

0.7976

0.8043

0.7961

27

82

AUD/USD fails to test the 2017-high (0.8066), with the pair at risk for a near-term correction as the Reserve Bank of Australia (RBA) toughens the verbal intervention on the local currency.

The fresh rhetoric coming out of the RBA suggests the central bank is in no rush to normalize monetary policy as officials warn ‘an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.’ As a result, Governor Philip Lowe and Co. may continue to endorse a wait-and-see approach at the next meeting on September 5, and the RBA may carry the record-low cash rate into 2018 as ‘wage growth remains low and this is likely to continue for a while yet.’

In turn, AUD/USD may stage a larger pullback as the RBA adopts a cautious tone, but the shift in market behavior may continue to unfold over the coming months especially as Fed Fund Futures continue to highlight a 50/50 chance for a December rate-hike.

AUD/USD Daily Chart

AUD/USD Daily Chart

Chart - Created Using Trading View

  • Longer-term outlook for AUD/USD remains constructive following the break of the 2016-range, but the lack of momentum to close above the close the 0.8020 (38.2% expansion) hurdle raises the risk for a larger pullback especially as the Relative Strength Index (RSI) finally appears to be coming off of overbought territory.
  • May see a bearish RSI trigger emerge over the days ahead if the oscillator fails to preserve the bullish formation from May; move below the Fibonacci overlap around 0.7930 (50% retracement) to 0.7940 (61.8% retracement) opens up the next downside hurdle around 0.7850 (38.2% retracement) to 0.7860 (61.8% expansion) followed by the former-resistance zone around 0.7720 (23.6% retracement) to 0.7740 (78.6% expansion).
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  • Retail trader data shows 37.7% of traders are net-long GBP/USD with the ratio of traders short to long at 1.65 to 1. In fact, traders have remained net-short since June 23 when GBP/USD traded near 1.27744; price has moved 3.6% higher since then. The number of traders net-long is 2.7% lower than yesterday and 26.4% lower from last week, while the number of traders net-short is 0.6% higher than yesterday and 10.2% higher from last week.
  • Retail trader data shows 32.4% of traders are net-long AUD/USD with the ratio of traders short to long at 2.08 to 1. In fact, traders have remained net-short since June 04 when AUD/USD traded near 0.74405; price has moved 7.4% higher since then. The number of traders net-long is 1.5% higher than yesterday and 11.8% higher from last week, while the number of traders net-short is 0.9% higher than yesterday and 8.8% lower from last week.
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--- 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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