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AUD/USD Forecast: 2020 High on Radar as RSI Sits in Overbought Zone

AUD/USD Forecast: 2020 High on Radar as RSI Sits in Overbought Zone

David Song, Strategist

Australian Dollar Talking Points

AUD/USD trades to a fresh monthly high following the Reserve Bank of Australia (RBA) interest rate decision, and the exchange rate may attempt to test the 2020 high (0.7032) as the Relative Strength Index (RSI) sits in overbought territory.

AUD/USD Forecast: 2020 High on Radar as RSI Sits in Overbought Zone

The Australian Dollar has outperformed against all of its major counterparts in May, and the bullish behavior may persist in June as the RBA keeps the official cash rate (OCR) at the record low of 0.25% and tames speculation for additional monetary support.

Image of RBA interest rate decisions

Source: RBA

It seems as though the RBA will continue to alter the forward guidance even though the update to the 1Q Gross Domestic Product (GDP) report signals an end to Australia’s record period of economic growth as the central bank insists that “it is possible that the depth of the downturn will be less than earlier expected.”

The comments suggest the RBA has yet to rule out a V-shaped recovery as “the substantial, coordinated and unprecedented easing of fiscal and monetary policy in Australia is helping the economy through this difficult period,” and Governor Philip Lowe and Co. appear to be on track to carry out a wait-and-see approach throughout the remainder of the year as “the Board will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band.”

However, the RBA points out that “it is likely that this fiscal and monetary support will be required for some time” amid the gradual process in reopening the Australian economy, and the threat of a protracted recovery may put pressure on the central bank to deploy more non-standard measures as stimulus programs like the Jobkeeper Payment is set to expire on September 27.

In turn, the Australian Dollar is likely to face headwinds if the RBA reverts back to a dovish forward guidance, but current market conditions may keep AUD/USD afloat as the Federal Reserve prepares to have the Municipal Liquidity Facility along with the Main Street Lending Program up and running in June.

With that said, the Australian Dollar may continue to outperform its major counterparts in June as the RBA continues to abandon the dovish forward guidance for monetary policy, and the break above the February high (0.6774) may spur a run at the 2020 high (0.7032) as the Relative Strength Index (RSI) sits in overbought 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 was a key dynamic for AUD/USD in the fourth quarter of 2019 as the exchange rate carved a major low on October 2, with the high for November occurring during the first full week of the month, while the low for December materialized 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, with the exchange rate carving the February high during the first week of the month.
  • However, the opening range for March was less relevant, with the high of the month occurring on the 9th, the same day as the flash crash.
  • Nevertheless, the advance from the yearly low (0.5506) continues to evolve as AUD/USD breaks out of the April range, with the exchange rate clearing the February high (0.6774) as the Relative Strength Index (RSI) pushes into overbought territory.
  • Will keep a close eye on the RSI as it holds above 70, and the bullish behavior in AUD/USD may persist as long as the oscillator sits in overbought territory.
  • Need a break/close above the Fibonacci overlap around 0.6970 (23.6% expansion) to 0.6980 (23.6% expansion) to open up the 2020 high (0.7032), with the next area of interest coming in around 0.7090 (78.6% retracement).
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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.