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AUD/USD Outlook: RSI Flirts with Oversold Territory Ahead of RBA Meeting

AUD/USD Outlook: RSI Flirts with Oversold Territory Ahead of RBA Meeting

David Song, Strategist

Australian Dollar Talking Points

AUD/USD trades to a fresh monthly low (0.7055) as it extends the series of lower highs and lows from last week, and recent developments in the Relative Strength Index (RSI) warn of a further decline in the exchange rate as it pushes into oversold territory for the first time in 2022.

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AUD/USD Outlook: RSI Flirts with Oversold Territory Ahead of RBA Meeting

AUD/USD is on track to test the February low (0.7033) as it gives back the advance following the larger-than-expected uptick in Australia’s Consumer Price Index (CPI), and the US Dollar may continue to appreciate against its major counterparts as it benefits from the ongoing deterioration in risk appetite.

Image of DailyFX Economic Calendar for Australia

The shift in investor confidence looks poised to persist ahead of the next Reserve Bank of Australia (RBA) interest rate decision on May 3 as the US economy unexpectedly contracts in the first quarter of 2022, and the move below 30 in the RSI is likely to be accompanied by a further decline in AUD/USD like the behavior seen late last year.

However, a change in RBA policy may curb the recent selloff in AUD/USD as the central bank is expected to lift the official cash rate (OCR) from 0.10% to 0.25%, and a material change in the forward guidance for monetary policy may shore up the Australian Dollar if Governor Philip Lowe and Co. prepare households and businesses for a series of rate hikes.

Until then, swings in risk appetite may sway AUD/USD as the US stock market appears to be finding support, 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 73.14% of traders are currently net-long AUD/USD, with the ratio of traders long to short standing at 2.72 to 1.

The number of traders net-long is 5.49% higher than yesterday and 28.41% higher from last week, while the number of traders net-short is 14.48% lower than yesterday and 41.14% lower from last week. The rise in net-long interest has fueled the crowding behavior as 69.25% of traders were net-long AUD/USD earlier this week, while the decline in net-short position comes as the exchange rate trades to a fresh monthly low (0.7055).

With that said, AUD/USD may attempt to test the February low (0.7033) as it extends the series of lower highs and lows carried over from last week, and developments in the RSI may show the bearish momentum gathering pace as the indicator pushes below 30 for the first time this year.

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 (0.7352) establishing a positive slope as it pushes above the 200-Day SMA (0.7288) for the first time since July.
  • However, the 50-Day SMA (0.7352) no longer reflects a positive slope, with the recent selloff in AUD/USD pushing the Relative Strength Index (RSI) into oversold territory for the first time in 2022.
  • The move below 30 in the RSI is likely to be accompanied with a further decline in AUD/USD like the behavior seen late last year, but need a close below the 0.7070 (61.8% expansion) to 0.7090 (78.6% retracement) area to raise the scope for a test of the February low (0.7033).
  • Failure to defend the yearly low (0.6968) opens up the 0.6940 (78.6% expansion) area, with the next region of interest coming in around 0.6820 (23.6% retracement).

--- 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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