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AUD/USD Analysis: RSI Flirts with Overbought Zone Ahead of RBA Meeting

AUD/USD Analysis: RSI Flirts with Overbought Zone Ahead of RBA Meeting

David Song, Strategist

Australian Dollar Talking Points

AUD/USD trades to fresh 2020 highs following the Federal Reserve Economic Symposium, and the Reserve Bank of Australia (RBA) interest rate decision may do little to derail the appreciation in the Australian Dollar as the central bank is expected to retain a wait-and-see approach for monetary policy.

AUD/USD Analysis: RSI Flirts with Overbought Zone Ahead of RBA Meeting

AUD/USD extends the series of higher highs and lows from the previous week to tag a fresh monthly high (0.7381) as the Federal Open Market Committee (FOMC) plans to “achieve inflation that averages 2 percent over time.

The prepared remarks from Chairman Jerome Powell suggest the FOMC will continue to rely on its emergency tools to support the US economy as the “new Statement on Longer-Run Goals and Monetary Policy Strategy conveys our continued strong commitment to achieving our goals, given the difficult challenges presented by the proximity of interest rates to the effective lower bound.

It seems as though the FOMC is in no rush to alter the path for monetary policy as the committee votes unanimously to push back “the expiration of the temporary U.S. Dollar liquidity swap lines through March 31,” and the Chairman Powell and Co. appear to be on track to retain the current policy at the next interest rate September 16 as the central bank vows to “increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace.”

Meanwhile, the Reserve Bank of Australia (RBA) may sound more upbeat compared to its US counterpart as “the Bank's policy package was continuing to work broadly as expected,” and Governor Philip Lowe and Co. may continue to tame speculation for additional monetary support as the central bank persistently rules out a negative interest rate policy (NIRP).

Image of DailyFX economic calendar for Australia

In turn, the RBA may stick to the same script at the September 1 meeting as “a recovery was under way in most of Australia,” but Governor Lowe and Co. may gradually alter the forward guidance over the coming months as the central bank insists that “it would be appropriate to remove the yield target before the cash rate itself is raised.

The different approach in managing monetary policy may keep AUD/USD afloat as the RBA highlights a broad exit strategy, and the Australian Dollar may continue to appreciate against is US counterpart as current market trends look poised to persist in September.

Image of IG Client Sentiment for AUD/USD rate

The IG Client Sentiment report shows retail traders have been net-short AUD/USD since April, with the latest update showing only 27.29% of traders net-long the pair as the ratio of traders short to long stands at 2.66 to 1. The number of traders net-long is 9.58% lower than yesterday and 33.26% lower from last week, while the number of traders net-short is 12.75% higher than yesterday and 38.71% higher from last week.

The decline in net-long position could be a result of profit-taking behavior as AUD/USD trades to fresh yearly highs ahead of the RBA meeting, while the rise in net-short interest suggests the crowding behavior in the Greenback will carry into the month ahead even though the DXY index is on the verge of breaking a key support zone.

With that said, the bullish behavior in AUD/USD may persist as it clears the 2019 high (0.7295), with the Relative Strength Index (RSI) highlighting a similar dynamic as it threatens the downward trend from earlier this year and attempts to push into 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 advance from the 2020 low (0.5506) gathered pace as AUD/USD broke out of the April range, with the exchange rate clearing the January high (0.7016) in June as the Relative Strength Index (RSI) pushed into overbought territory.
  • AUD/USD managed to clear the June high (0.7064) during the previous month even though the RSI failed to retain the upward trend from earlier this year, with the oscillator pushing into overbought territory for the fourth time in late-July.
  • The RSI established a bullish trend in July as AUD/USD traded to fresh yearly highs, but the indicator deviated with price as it snaps trendline support after failing to push into overbought territory.
  • Nevertheless, recent developments in the RSI instill a bullish outlook for AUD/USD as it threatens the downward trend from earlier and flirts with overbought territory, with a definitive break above 70 likely to be accompanied by a further appreciation in the exchange rate like the behavior seen in June.
  • The move above the 2019 high (0.7295) comes as AUD/USD bounces back from the Fibonacci overlap around 0.7090 (78.6% retracement) to 0.7140 (23.6% retracement), with the December 2018 high (0.7394) on the radar as the exchange rate extends the series of higher highs and lows from the previous week.
  • Need a break/close above the 0.7370 (38.2% expansion) region to open up the July 2018 high (0.7484), with the next area of interest coming in around 0.7560 (50% expansion) to 0.7570 (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.

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