Australian Dollar Fails to Defend January Opening Range Ahead of FOMC

Australian Dollar Talking Points

AUD/USD struggles to push back above the 50-Day SMA(0.7182) as it gives back the advance following the larger-than-expected uptick in Australia’s Consumer Price Index (CPI), and the exchange rate may continue to trade to fresh monthly lows as it snaps the opening range for January ahead of the Federal Reserve interest rate decision.

Australian Dollar Fails to Defend January Opening Range Ahead of FOMC

AUD/USD pushed to a fresh monthly low (0.7091) at the start of the week on the back of US Dollar strength, but the exchange rate may hold steady going into the Federal Open Market Committee (FOMC) rate decision as it fails to extend the series of lower highs and lows carried over from the previous week.

Fresh remarks from the FOMC may reveal a more detailed exit strategy as the central bank looks to implement higher interest rates in 2022, and talks of unloading the Fed’s balance sheet may drag on AUD/USD as the Reserve Bank of Australia (RBA) remains in no rush to normalize monetary policy.

At the same time, the FOMC may merely emphasize its plans to “reduce the monthly pace of our net asset purchases by $20 billion for Treasury securities and $10 billion for agency mortgage-backed securities” in response to the weaker-than-expected US Non-Farm Payrolls (NFP) report, and the central bank may wait for the next quarterly meeting in March to adjust the forward guidance for monetary policy as Chairman Jerome Powell and Co. acknowledge that “the rise in COVID cases in recent weeks, along with the emergence of the Omicron variant, pose[s] risks to the outlook.”

In turn, more of the same from the FOMC may generate a bearish reaction in the US Dollar as market participants push out bets for quantitative tightening (QT), and a near-term rebound in the exchange rate may alleviate the recent flip in retail sentiment like the behavior seen in 2021.

The IG Client Sentiment report shows 59.47% of traders are currently net-long AUD/USD, with the ratio of traders long to short standing at 1.47 to 1.

The number of traders net-long is 2.60% lower than yesterday and 0.62% lower from last week, while the number of traders net-short is 18.07% higher than yesterday and 4.19% lower from last week. The decline in both net-long and net-short interest comes as AUD/USD appears to be stuck in a narrow range ahead of the Fed rate decision, with the ratio narrowing from a reading of 60.07% during the previous week.

With that said, recent price action raises the scope for a further decline in AUD/USD as it fails to defend the opening range for January, but more of the same from the FOMC may prop up the exchange rate as it snaps the recent series of lower highs and lows.

AUD/USD Rate Daily Chart

Source: Trading View

• Keep in mind, AUD/USD traded to a fresh 2021 low (0.6993) in December, which pushed the Relative Strength Index (RSI) into oversold territory, but a textbook buy signal emerged following the failed attempt to test the November 2020 low (0.6991) as the oscillator climbed back above 30.
• The advance from the 2021 low (0.6993) may turn out to be a correction in the broader trend as the 50-Day SMA (0.7183) and 200-Day SMA (0.7405) still reflect a negative slope, and AUD/USD may continue to trade to fresh monthly lows as it fails to defend the opening range for January.
• However, lack of momentum to close below the Fibonacci overlap around 0.7130 (61.8% retracement) to 0.7180 (61.8% retracement) may lead to near-term rebound in AUD/USD as it snaps the recent series of lower highs and lows, with a move above the 50-Day SMA (0.7183) bringing the 0.7260 (38.2% expansion) region on the radar.
• Need a break above the monthly high (0.7314) to bring the 0.7370 (38.2% expansion) region on the radar, with the next area of interest coming in around 0.7440 (23.6% expansion).
• At the same time, a close below the Fibonacci overlap around 0.7130 (61.8% retracement) to 0.7180 (61.8% retracement) may push AUD/USD back towards the 0.7070 (61.8% expansion) to 0.7090 (78.6% retracement) area, with a break of the 2021 low (0.6993) opening up the 0.6940 (78.6% expansion) region.

--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong