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AUDUSD Range Vulnerable to Dovish RBA Forward Guidance

AUDUSD Range Vulnerable to Dovish RBA Forward Guidance

David Song, Strategist

Australian Dollar Talking Points

AUDUSD trades near the 2019-low (0.6677) ahead of the Reserve Bank of Australia (RBA) meeting, and the exchange rate may face a more bearish fate over the coming days if the central bank prepares Australian household and businesses for lower interest rates.

AUDUSD Range Vulnerable to Dovish RBA Forward Guidance

AUDUSD may continue to track the range-bound price action from August as the RBA is widely expected to keep the official cash rate (OCR) at the record-low of 1.00%.

It seems as though the RBA will largely endorse a wait-and-see approach as Governor Philip Lowe insists “the exchange rate has become the great stabiliser of the Australian economy, arguably playing a more important role than monetary policy in dealing with the major shocks that we have experienced over recent times.

The comments suggest the RBA will remain on the sidelines as the flexible exchange rate provides a buffer, and the central bank may stick to the same script after delivering the back-to-back rate cuts as “the central scenario is for the Australian economy to grow by around 2½ per cent over 2019 and 2¾ per cent over 2020.

Image of RBA interest rate

However, the RBA may keep the door open to further embark on its rate easing cycle as the next round of US and China tariffs kick in this month, and the central bank may take additional steps to insulate the Australian economy amid the weakening outlook for global growth.

With that said, hints of a looming RBA rate cut are likely to drag on AUDUSD, but the Aussie-Dollar exchange rate may face range bound conditions ahead of the central bank meeting as US traders remain offline in observance of Labor Day.

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AUD/USD Rate Daily Chart

Image of AUDUSD daily chart

Source: Trading View

  • Keep in mind, the AUDUSD rebound following the currency market flash-crash has been capped by the 200-Day SMA (0.7034), with the exchange rate marking another failed attempt to break/close above the moving average in July.
  • With that said, the broader outlook for AUDUSD remains tilted to the downsideas both price and the Relative Strength Index (RSI) continue to track the bearish formations from late last year.
  • However, the string of failed attempts to close below the Fibonacci overlap around 0.6720 (78.6% expansion) to 0.6730 (100% expansion) may keep AUDUSD in its current range, with a move above the 0.6800 (61.8% expansion) handle opening up the former-support zone around 0.6850 (78.6% expansion) to 0.6880 (23.6% retracement).
  • Nevertheless, a break/close below 0.6720 (78.6% expansion) to 0.6730 (100% expansion) the region may push AUDUSD to fresh yearly lows, with the first area of interest coming in around 0.6620 (100% expansion).

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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.

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

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