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AUD/USD Rate Outlook Mired by Textbook RSI Sell Signal

AUD/USD Rate Outlook Mired by Textbook RSI Sell Signal

2020-01-06 06:00:00
David Song, Strategist
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Australian Dollar Talking Points

The opening range for 2020 is in focus for AUD/USD as the exchange rate snaps the series of higher highs and lows from the end of December, while the Relative Strength Index (RSI) falls back from overbought territory.

AUD/USD Rate Outlook Mired by Textbook RSI Sell Signal

There appeared to be a shift in AUD/USD behavior as it closed above the 200-Day SMA (0.6899) for the first time since 2018, but the near-term correction appears to have stalled ahead of the July high (0.7082) even though the US and China, Australia’s largest trading partner, pledge to sign the Phase One trade deal over the coming days.

The narrowing threat of a US-China trade war may influence the near-term outlook for AUD/USD as the Trump administration plans to sign the phase one deal on January 15, withPresident Donald Trump preparing to visit Beijing at a later date “where talks will begin on Phase Two.”

A US-China trade deal may spark a bullish reaction in AUD/USD as it instills an improved outlook for the Asia/Pacific region, and the Reserve Bank of Australia (RBA) may stick to the sidelines at its first meeting for 2020 as “the Australian economy appears to have reached a gentle turning point.

Image of RBA interest rate decisions

In turn, Governor Philip Lowe and Co. may strike an improved outlook and tame speculation for lower interest rates on February 4 as officials “assess the evidence of how the easing in monetary policy was affecting the economy.”

However, the RBA may emphasize that the board has “the ability to provide further stimulus” amid the weakening outlook for global growth, and the dovish forward guidance may produce headwind for the Australian Dollar especially as the International Monetary Fund (IMF) warns that “unconventional monetary policy measures such as quantitative easing may become necessary.”

With that said, the diverging paths for monetary policy may rattle the Australian Dollar as the Federal Reserve moves way from its rate easing cycle, and the recent shift in AUD/USD behavior may turn out to be a mere correction in the exchange rate as the advance from the advance from the 2019 low (0.6671) sputters ahead of the July high (0.7082).

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AUD/USD Rate Daily Chart

Image of AUD/USD rate daily chart

Source: Trading View

  • AUD/USD has been capped by the 200-Day SMA (0.6900) for most of 2019, but the recent break/close above the moving average signals a potential shift in market behavior especially as the Relative Strength Index (RSI) pushes into overbought territory for the first time since 2018.
  • However, the bullish momentum appears to be abating as the RSI flashes a textbook sell signal and breaks the upward trend from December.
  • At the same time, AUD/USD has snapped the series of higher highs and lows from late December after failing to close above the 0.7020 (50% expansion) region, with the lack of momentum to test the July high (0.7082) raising the risk for a further decline in the exchange rate.
  • A break/close below 0.6910 (38.2% expansion) may open up the Fibonacci overlap around 0.6830 (23.6% expansion) to 0.6850 (78.6% expansion), with the next area of interest coming in around 0.6780 (38.2% expansion) to 0.6800 (61.8% 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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