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AUD/USD Rate Outlook Hinges on Looming RSI Signal

AUD/USD Rate Outlook Hinges on Looming RSI Signal

David Song, Strategist

Australian Dollar Talking Points

AUD/USD consolidates after trading to a fresh yearly high (0.7454) earlier this week, and looming developments in the Relative Strength Index (RSI) may show the bullish momentum gathering pace as the indicator flirts with overbought territory for the first time since September.

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AUD/USD Rate Outlook Hinges on Looming RSI Signal

AUD/USD trades to fresh 2020 highs in December as the US Dollar broadly reflects an inverse relationship with investor confidence, with the correction from the September high (0.7414) providing to be an exhaustion in the bullish trend rather than a change in behavior as the Reserve Bank of Australia (RBA) moves to the sidelines ahead of 2021.

Recent remarks by RBA Governor Philip Lowe suggest the board will endorse a wait-and-see approach over the coming months as “the economic news has, on balance, been better than we were expecting,” with the central bank head going onto say that the focus is now on actual outcomes for inflation and unemployment, rather than forecast outcomes” while testifying in front of the House of Representatives Standing Committee on Economics.

Lowe insist that the RBA remains “prepared to do more, if that is required” even though the central bank plans to purchase $100 billion of Australian government bonds over the next 6 months, but it seems as though the board is in no rush to deploy more unconventional tools as “we are still of the view that a negative policy interest rate in Australia is extraordinarily unlikely, with any benefits being outweighed by the costs.

In turn, key market trends may continue to influence AUD/USD ahead of the next RBA meeting on February 1 as Governor Lowe and Co. acknowledge that “the improvement in risk sentiment has also been associated with a depreciation of the US dollar and an appreciation of the Australian dollar, and tilt in retail sentiment also looks poised to persist as the crowding behavior from earlier this year reappears.

Image of IG Client Sentiment for AUD/USD rate

The IG Client Sentiment report shows 35.93% of traders are net-long with the ratio of traders short to long at 1.78 to 1. The number of traders net-long is 19.83% higher than yesterday and 7.34% higher from last week, while the number of traders net-short is 3.19% lower than yesterday and 3.94% lower from last week.

The decline in net-short position comes as AUD/USD tags a fresh yearly high (0.7454) earlier this week, while the rise in net-long interest has helped to alleviate the tilt in retail sentiment as only 32.11% of traders were net-long the pair at the start of December.

With that said, key market trends may continue to influence AUD/USD as the US Dollar broadly reflects an inverse relationship with investor confidence, and looming developments in the Relative Strength Index (RSI) may show the bullish momentum gathering pace as the indicator flirts with overbought territory for the first time since September.

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) in July even though the RSI failed to retain the upward trend from earlier this year, with the exchange rate pushing to fresh yearly highs in August and September to trade at its highest level since 2018.
  • The RSI instilled a bullish outlook for AUD/USD during the same period as it threatened the downward trend from earlier this year to push into overbought territory for the fourth time in 2020, but a textbook sell-signal emerged as the indicator quickly slipped back below 70.
  • The RSI established a downward trend in September as the indicator fell to its lowest level since April, but the bearish momentum has abated as the indicator failed to push into oversold territory to reflect the extreme readings seen in March.
  • As a result, the correction from the September high (0.7414) proved to be an exhaustion in the bullish trend rather than a change in behavior as AUD/USD cleared the October high (0.7243) in November, with the exchange rate trading to fresh yearly highs in December.
  • Looming developments in the RSI may show the bullish momentum gathering pace as the indicator flirts with overbought territory for the first time since September, with a break above 70 likely to be accompanied by a further appreciation in AUD/USD like the behavior seen earlier this year.
  • Still need a close above the 0.7440 (23.6% expansion) to 0.7480 (50% expansion) region to open up the Fibonacci overlap around 0.7560 (50% expansion) to 0.7580 (61.8% expansion).
  • However, lack of momentum to hold above the 0.7370 (38.2% expansion) to 0.7390 (38.2% expansion) area may bring the 0.7270 (23.6% expansion) region back on the radar, and the RSI may warn of a larger pullback in AUD/USD if the oscillator fails to retain the upward trend carried over from November.

--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

https://www.tradingview.com/symbols/AUDUSD/

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

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