AUD/USD Short Term Levels Ahead of The RBA Rate Decision
- AUD/USD finding difficulties above the 0.76 handle
US ISM Manufacturing index and the RBA rate decision are the main event risk on the docket in the hours ahead, and could induce significant volatility for the pair.
Taking this into consideration, we look to find short term trading opportunities using the Grid Sight Index (GSI) indicator.
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The US ISM Manufacturing July figures are the first major event risk on the docket this week, set to hit the wires 14:00 GMT. The diffusion index is expected to slightly down tick for a 53.0 print from the prior 53.2 figure. The ISM numbers tend to have market moving impact, which could be amplified this time around as the market digests the huge miss to US 2Q GDP estimates this Friday.
Immediate impact of the GDP figures were reduced probabilities for a rate hike in the near future (based on Fed funds futures), with the larger narrative potentially being lower than expected growth in the US possibly harming the perceived stability in the US economy.
Further evidence today adding to the possible negative implications from Friday, especially with the ISM being a very timely indicator, could potentially send the US Dollar tumbling.
The RBA August rate decision in set to be announced 04:30 GMT. Expectations are for a cut in today’s meeting to 1.50% from the prior 1.75%. With that said, a cut is by no means a guarantee.
If the central bank opts to keep rates unchanged, the Australian Dollar seems likely to rise as participants could be caught on the wrong side. In case of a cut, focus might be put on the policy statement for evidence on the rate path. It remains to be seen how much scope the RBA has to cut rates going forward. If the RBA cuts but point to a “wait and see approach” down the line, the Australian Dollar may find support relatively soon as a 1.5% rate is still attractive in the current record low yield environment.
AUD/USD 5-Min GSI Chart: August 1, 2016
The AUD/USD is approaching possible support at 0.7575 (see chart below), with GSI calculating higher percentage of past movement to the upside. The GSI indicator above calculates the distribution of past event outcomes given certain momentum patterns, and can give you a look at the market in a way that's never been possible before, analyzing millions of historical prices in real time. By matching events in the past, GSI describes how often the price moved in a certain direction.
AUD/USD Technical Levels:
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We use volatility measures as a way to better fit our strategy to market conditions. The AUD/USD is seeing reduced levels of volatility (on 14-day ATR study). In turn, this could imply that range bound trading plays might be appropriate, but caution is warranted on the aforementioned event risk. Friday’s US GDP miss seems like fertile ground for directional plays should the data point in the same direction.
AUD/USD 30-Min Chart: August 1, 2016
(Click to Enlarge)
The AUD/USD is trading below potential resistance at the 0.76 handle. Further levels of interest on a move higher may be a zone below the 0.7650 level, 0.7674 and a zone above the 0.77 figure.
Levels of interest on a move lower could be the 0.7575 level, an area below 0.7550, the big 0.75 figure (interim support could be found at 0.7515) and 0.7460.
When price reaches those levels, short term traders might use the GSI to view how prices reacted in the past given a certain momentum pattern, and see the distribution of historical outcomes in which the price reversed or continued in the same direction. We generally want to see GSI with the historical patterns significantly shifted in one direction, which could potentially be used with a pre-determined bias as well.
A common way to use GSI is to help you fade tops and bottoms, and trade breakouts. That’s why traders may want to use the GSI indicator when price reaches those specific pre-determined levels, and fit a strategy that can offer a proper way to define risk. We studied over 43 million real trades and found that traders who do that were three times more likely to turn a profit. Read more on the “Traits of Successful Traders” research.
Meanwhile, the DailyFX Speculative Sentiment Index (SSI) is showing that about 45.4% of traders are long the AUD/USD at the time of writing. The SSI is mainly used as a contrarian indicator implying a slight long bias.
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--- Written by Oded Shimoni, Junior Currency Analyst for DailyFX.com
To contact Oded Shimoni, e-mail firstname.lastname@example.org
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.