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AUD/USD Rate Clears March Low Ahead of Australia Inflation Report

AUD/USD Rate Clears March Low Ahead of Australia Inflation Report

David Song, Strategist

Australian Dollar Talking Points

AUD/USD clears the March low (0.7165) as it extends the series of lower highs and lows from late last week, but the update to Australia’s Consumer Price Index (CPI) may curb the recent selloff in the exchange rate as the headline reading for inflation is expected to increase for two consecutive quarters.

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AUD/USD Rate Clears March Low Ahead of Australia Inflation Report

AUD/USD appears to be tracking the recent weakness in the US stock market as it trades to a fresh monthly low (0.7135), and a further shift in investor confidence may keep the exchange rate under pressure as the Greenback benefits from the deterioration in risk appetite.

As a result, the Relative Strength Index (RSI) may show the bearish momentum gathering pace as the oscillator approaches oversold territory, and a move below 30 in the indicator is likely to be accompanied by a further decline in AUD/USD like the price action seen in the fourth quarter of 2021.

Image of DailyFX Economic Calendar for Australia

However, the update to Australia’s CPI may spark a bullish reaction in the Australian Dollar as the headline reading is projected to increase to 4.6% from 3.5% per annum in the fourth quarter of 2021, which would mark the highest reading since 2008.

Evidence of rising inflation may sway the Reserve Bank of Australia (RBA) as the central bank acknowledges that “higher prices for petrol and other commodities will result in a further lift in inflation over coming quarters,” and a material rise in Australia’s CPI may generate a rebound in AUD/USD as it puts pressure on Governor Philip Lowe and Co. to lift the official cash rate (OCR) from the record-low of 0.10%.

In turn, AUD/USD may stage a near-term rebound ahead of the next RBA rate decision on May 3, but a further decline in the exchange rate may continue to fuel the recent flip in retail sentiment like the behavior seen during the previous year.

Image of IG Client Sentiment for AUD/USD rate

The IG Client Sentiment report shows 69.25% of traders are currently net-long AUD/USD, with the ratio of traders long to short standing at 2.25 to 1.

The number of traders net-long is 9.77% higher than yesterday and 24.51% higher from last week, while the number of traders net-short is 10.90% lower than yesterday and 34.34% lower from last week. The rise in net-long interest has fueled the flip in retail sentiment as 51.30% of traders were net-long AUD/USD last week, while the decline in net-short position comes as the exchange rate trades to a fresh monthly low (0.7135).

With that said, recent price action raises the scope for a further decline in AUD/USD as it extends the series of lower highs and lows from late last week, but another uptick in Australia’s CPI may curb the recent weakness in the exchange rate as it encourages the RBA to switch gears.

AUD/USD Rate Daily Chart

Image of AUD/USD rate daily chart

Source: Trading View

  • Keep in mind, AUD/USD cleared the October high (0.7556) earlier this month as it climbed to a fresh yearly high (0.7661), with the 50-Day SMA (0.7355) establishing a positive slope as it pushes above the 200-Day SMA (0.7291) for the first time since July.
  • However, the AUD/USD rally from earlier this month failed to push the Relative Strength Index (RSI) into overbought territory amid the lack of momentum to close above the 0.7640 (38.2% retracement) region, with the oscillator now approaching oversold territory as the exchange rate clears the March low (0.7165).
  • A move below 30 in the RSI is likely to be accompanied by a further decline in AUD/USD like the price action seen late last year, with a break/close below the Fibonacci overlap around 0.7130 (61.8% retracement) to 0.7180 (61.8% retracement) opening up the 0.7070 (61.8% expansion) to 0.7090 (78.6% retracement) area.
  • Failure to defend the 2021 low (0.6993) brings the 0.6940 (78.6% expansion) region on the radar, with the next area of interest coming in around 0.6770 (100% expansion) to 0.6820 (23.6% retracement).
  • Need a close back above 0.7260 (38.2% expansion) to bring the 0.7370 (38.2% expansion) area back on the radar, with the next area of interest coming in around 0.7440 (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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