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AUD/USD Rate Outlook Mired by Bearish RSI Formation

AUD/USD Rate Outlook Mired by Bearish RSI Formation

David Song, Strategist

Australian Dollar Talking Points

AUD/USD attempts to pare the sharp decline following the Federal Reserve interest rate decision, with the exchange rate bouncing back from a fresh monthly-low (0.7086), but the weakness may persist over the near-term as the Relative Strength Index (RSI) continues to track the bearish formation from earlier this month.

Image of daily change for major currencies

AUD/USD Rate Outlook Mired by Bearish RSI Formation

Image of daily change for audusd rate

The limited reaction to the 37.0K expansion in Australia Employment leaves AUD/USD vulnerable to near-term headwinds as the report reveals a 6.4K contraction in full-employment, with the expansion in the headline reading driven by a 43.4K rise in part-time positions.

In response, the Reserve Bank of Australia (RBA)may continue to endorse a wait-and-see approach at the next meeting on February 5, and Governor Philip Lowe & Co. may keep the official cash rate (OCR) at the record-low throughout the first-half of 2019 as the lingering threat of a U.S.-China trade war clouds the economic outlook for the Asia/Pacific region.

The diverging paths for monetary policy casts a long-term bearish outlook for AUD/USD especially as the Federal Reserve show no signs of abandoning its hiking-cycle, with the aussie-dollar exchange rate still at risk of giving back the advance from the 2018-low (0.7021) as both price and the Strength Index (RSI) snap the bullish formations carried over from October.

Image of IG client sentiment for audusd rate

Nevertheless, the IG Client Sentiment Report shows 72.7%of traders are now net-long AUD/USD compared to 65.6% yesterday, with the ratio of traders long to short at 2.66 to 1.In fact, traders have been net-long since December 4 when AUD/USD traded near 0.7350 even though price has moved 3.4% lower since then.The number of traders net-long is 2.3% higher than yesterday and 0.3% higher from last week, while the number of traders net-short is 28.9% lower than yesterday and 34.1% lower from last week.

Profit-taking behavior likely accounts for the drop in net-short interest, but the ongoing tilt in retail interest offers a contrarian view to crowd sentiment especially as the RBA appears to be bracing for a weaker exchange rate. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups.

AUD/USD Daily Chart

Image of audusd daily chart
  • Keep in mind, the opening range for December keeps the downside targets on the radar for AUD/USD as it slips to fresh monthly lows, but now waiting for a close below the 0.7090 (78.6% retracement) to 0.7110 (78.6% retracement) region to open up the next downside hurdle around 0.7020 (50% expansion) area comes up next, which lines up with the 2018-low (0.7021).
  • Will keep a close eye on the Relative Strength Index (RSI) as the oscillator extends the bearish formation from earlier this month, with the next downside hurdle coming in around 0.6950 (61.8% expansion).

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.

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