AUD/USD Holds Above 50-Day SMA Ahead of RBA Rate Decision

Australian Dollar Talking Points

AUD/USD trades to a fresh monthly high (0.7014) as it initiates a series of higher highs and lows, and the exchange rate may continue to appreciate ahead of the Reserve Bank of Australia (RBA) interest rate decision on August 2 as it holds above the 50-Day SMA (0.6968).

AUD/USD Holds Above 50-Day SMA Ahead of RBA Rate Decision

Unlike the price action in June, the recent advance in AUD/USD appears to be unfazed by the moving average, and the exchange rate may stage a larger recovery over the coming days as the unexpected contraction in US GDP puts pressure on the Federal Reserve to winddown its hiking cycle.

Meanwhile, the RBA is expected to deliver another 50bp rate hike as the central bank insists that “the Australian economy remains resilient,” and it seems as though Governor Philip Lowe and Co. will implement higher interest rates throughout the remainder of the year as the “Board expects to take further steps in the process of normalising monetary conditions.”

As a result, the RBA may continue to prepare Australian households and businesses for higher interest rates as the minutes from the July meeting reveal that “estimates of the nominal neutral rate were above the cash rate in the decade prior to the pandemic,” but it seems as though the board is in no rush to implement a restrictive policy as “inflation is forecast to peak later in 2022.”

In turn, a shift in the RBA’s forward guidance for monetary policy may drag on AUD/USD if the central bank delivers a dovish rate hike, while the tilt in retail sentiment looks poised to persist ahead of the rate decision amid the decline in open interest.

The IG Client Sentiment report shows 58.83% of traders are currently net-long AUD/USD, with the ratio of traders long to short standing at 1.43 to 1.

The number of traders net-long is 1.84% higher than yesterday and 3.57% lower from last week, while the number of traders net-short is 15.32% lower than yesterday and 2.40% lower from last week. The decline in net-long interest has done little to alleviate the crowing behavior as 55.76% of traders were net-long AUD/USD earlier this week, while the decline in net-short position comes as the exchange rate pushes to a fresh monthly high (0.7014).

With that said, AUD/USD may stage a larger recovery ahead of the RBA meeting as it initiates a series of higher highs and lows, and the exchange rate may continue to retrace the decline from the June high (0.7283) as it holds above the 50-Day SMA (0.6968).

AUD/USD Rate Daily Chart

Source: Trading View

• AUD/USD may continue to carve a series of higher highs and lows as the 50-Day SMA (0.6968) fails to curb the recent advance in the exchange rate, with a break/close above the 0.7050 (38.2% retracement) to 0.7070 (61.8% expansion) region bringing the Fibonacci overlap around 0.7130 (61.8% retracement) to 0.7180 (61.8% retracement) on the radar.
• Next area of interest comes in around 0.7260 (38.2% expansion), with a break above the June high (0.7283) opening up the 0.7370 (38.2% expansion) to 0.7420 (23.6% retracement) region.
• However, failure to break/close above the 0.7050 (38.2% retracement) to 0.7070 (61.8% expansion) region may keep AUD/USD within a defined range, with a move below 0.6940 (78.6% expansion) bringing the 0.6820 (23.6% retracement) area back on the radar.

--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong