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AUD/USD Rate Slips Below 200-Day SMA for First Since June 2020

AUD/USD Rate Slips Below 200-Day SMA for First Since June 2020

David Song, Strategist

Australian Dollar Talking Points

AUD/USD slips below the 200-Day SMA (0.7548) for the first time since June 2020 as fresh forecasts coming out of the Federal Reserve indicate two rate hikes for 2023, and the exchange rate appears to be on track to test the yearly low (0.7532) as it fails to retain the opening range for June.

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AUD/USD Rate Slips Below 200-Day SMA for First Since June 2020

AUD/USD trades to a fresh monthly low (0.7540) as the Federal Open Market Committee (FOMC) now forecasts the US economy to grow 7.0% in 2021, with the exchange rate largely unfazed by the sharp rise in Australia Employment as Fed officials show a greater willingness to switch gears sooner than previously projected.

Image of DailyFX economic calendar for Australia

It remains to be seen if the Reserve Bank of Australia (RBA) will respond to the 115.2K rise in job growth as the Unemployment Rate slips to 5.1% to mark its lowest reading since February 2020, and the ongoing improvement may encourage the central bank to gradually change its tone in the second half of the year as Governor Philip Lowe acknowledges that the “level of employment in Australia is above its pre-pandemic level.”

In a recent speech at the Australian Farm Institute Conference, Governor Lowe insists that “the economy is now transitioning from recovery mode to expansion mode,” with the central bank going onto say that “the GDP data also paint a positive picture of the recovery, which has been V-shaped.”

However, Governor Lowe warns that “it is premature to be considering ceasing bond purchases” as officials sees little probability of achieving the dual mandate until 2024, and it seems as though the RBA will continue to layout a dovish forward guidance at its next interest rate decision on July 6 as the central bank head reiterates that the Board “will not increase the cash rate until inflation is sustainably within the 2–3 per cent target range.

Until then, AUD/USD may face headwinds as the RBA appears to be on a preset course, and a further decline in the exchange rate may fuel the recent flip in retail sentiment like the behavior seen earlier this year.

Image of IG Client Sentiment for AUD/USD rate

The IG Client Sentiment report shows 65.93% of traders are currently net-long AUD/USD, with the ratio of traders long to short standing at 1.94 to 1.

The number of traders net-long is 14.67% higher than yesterday and 52.49% higher from last week, while the number of traders net-short is 33.96% lower than yesterday and 42.85% lower from last week. The jump in net-long interest has fueled the recent shift in retail sentiment as 57.60% of traders were net-long AUD/USD at the start of the week, while the sharp drop in net-short position could be a function of profit-taking behavior as the exchange rate slips below the 200-Day SMA (0.7548) for the first time since June 2020.

With that said, the decline from the February high (0.8007) may turn out to be protentional change in the broader trend amid ongoing shift in retail sentiment, and AUD/USD appears to be on track to test the yearly low (0.7532) as it fails to retain the opening range for June.

AUD/USD Rate Daily Chart

Image of AUD/USD rate daily chart

Source: Trading View

  • Keep in mind, a head-and-shoulders formation took shape earlier this year as AUD/USD traded to a fresh 2021 low (0.7532) in April, but the exchange rate negated the key reversal pattern following the failed attempts to close below the neckline around 0.7560 (50% expansion) to 0.7570 (78.6% retracement).
  • The Relative Strength Index (RSI)showed a similar dynamic as the oscillator reversed course ahead of oversold territory to break out of the downward trend from earlier this year, but the decline from the February high (0.8007) may turn out to be potential change in the broader trend as AUD/USD slips below the 200-Day SMA (0.7548) for the first time since June 2020.
  • A closing price below the 0.7560 (50% expansion) to 0.7570 (78.6% retracement) region opens up the 0.7500 (50% retracement) handle, with the next region of interest coming in around 0.7440 (23.6% expansion).
  • However, failure to close below the 0.7560 (50% expansion) to 0.7570 (78.6% retracement) region may push AUD/USD back towards the Fibonacci overlap around 0.7620 (38.2% retracement) to 0.7640 (38.2% retracement), with the next area of interest coming in around 0.7720 (38.2% expansion) to 0.7770 (23.6% expansion).

--- 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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