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AUD/USD Traders to Look Past Fed Testimony as Coronavirus Spreads

AUD/USD Traders to Look Past Fed Testimony as Coronavirus Spreads

2020-02-11 01:00:00
David Song, Currency Strategist
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Australian Dollar Talking Points

AUD/USD trades near the monthly low (0.6662) as Federal Reserve Chairman Jerome Powell prepares to testify in front of US lawmakers, but developments surrounding the Asia/Pacific region may influence the exchange rate over the coming days as China, Australia’s largest trading partner, struggles to contain the coronavirus.

AUD/USD Traders to Look Past Fed Testimony as Coronavirus Spreads

AUD/USDcleared the 2019 low (0.6671) following the 225K expansion in US Non-Farm Payrolls (NFP), and fresh remarks from Fed Chairman Powell may keep the exchange rate under pressure if the central bank head strikes an upbeat tone in front of Congress.

It remains to be seen if Chairman Powell will offer anything new while speaking in front of US lawmakers as the Federal Open Market Committee (FOMC) emphasizes that “policy is not on a preset course,” and the prepared remarks may merely reflect the discussion from the first meeting for 2020 as the central bank believes that “the current stance of monetary policy is appropriate to support sustained economic growth, a strong labor market, and inflation returning to our symmetric 2 percent objective.”

As a result, more of the same from the Chairman Powell may generate a limited reaction, and developments surrounding the Asia/Pacific region may influence AUD/USD over the coming days as China, Australia’s largest trading partner, struggles to contain the coronavirus.

In response, Chinese officials may attempt to ward off an economic shock by prescribing monetary as well as fiscal stimulus programsas the region grows at its slowest pace since 1992. With that in mind, efforts by China to achieve a growth target of 6% may keep the Reserve Bank of Australia (RBA) on the sidelines as the central bank states that “the bushfires and the coronavirus outbreak will temporarily weigh on domestic growth.

Image of RBA interest rate decision

In turn, the RBA may reiterate that “it is too early to determine how long-lasting the impact will be” at the next meeting on March 3, but Governor Philip Lowe and Co. may come under pressure to further insulate the economy as the central bank pledges to “to ease monetary policy further if needed.”

With that said, AUD/USD may face a more bearish fate over the coming months as the weakening outlook for the Asia/Pacific region raises the scope for a wider interest rate disparity between Australia and the US.

However, the recent decline in AUD/USD appears to be running out of steam as the Relative Strength Index (RSI) snaps the bearish formation from earlier this year, with the oscillator bouncing back from oversold territory.

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AUD/USD Rate Daily Chart

Image of AUD/USD rate daily chart

Source: Trading View

  • Keep in mind, the monthly opening range has been a key dynamic for AUD/USD in the fourth quarter of 2019 as the exchange rate carved a major low on October 2, with monthly high for November occurring during the first full week of the month, while the low for December happened on the first day of the month.
  • The opening range for 2020 showed a similar scenario as AUD/USD marked the high of the month on January 2, and recent price action keeps the downside on the radar as the exchange rate clears the 2019 low (0.6671).
  • Need a break/close below the Fibonacci overlap around 0.6620 (100% expansion) to 0.6650 (61.8% expansion) to open up the next area of interest around 0.6510 (161.8% expansion) to 0.6540 (78.6% expansion).
  • However, recent developments in the Relative Strength Index (RSI) suggests the recent decline in AUD/USD is running out of steam as the indicator snaps the downward trend from earlier this year, with the oscillator flashing a textbook buy signal as it bounces back from oversold territory.
  • Failure to break/close below the Fibonacci overlap around 0.6620 (100% expansion) to 0.6650 (61.8% expansion) may spur a move towards the 0.6720 (78.6% expansion) to 0.6730 (100% expansion), with the next area of interest coming in around the 0.6800 (38.2% expansion) handle.
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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.

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