Australian Dollar Talking Points

AUD/USD trades to a fresh monthly high (0.7187) after showing a limited reaction to the Reserve Bank of Australia’s (RBA) last rate decision for 2021, and the exchange rate may stage a larger recovery over the coming days as it clears the opening range for December.

AUD/USD Rate Clears December Opening Range Ahead of US CPI Report

The recent rebound in AUD/USD has pulled the Relative Strength Index (RSI), with the oscillator indicating a textbook buy signal as it climbs back above 30, and the exchange rate may continue to trade to fresh monthly highs as it extends the series of higher highs and lows from earlier this week.

Image of DailyFX Economic Calendar for US

However, the update to the US Consumer Price Index (CPI) may influence the near-term outlook for AUD/USD as the headline reading is expected to increase to 6.8% from 6.2% per annum in October, which would mark the highest reading since December 1981.

The core CPI is anticipated to show a similar dynamic as the index is seen climbing to 4.9% from 4.6% during the same period, and evidence of stronger inflation may trigger a bullish reaction in the US Dollar as it puts pressure on the Federal Reserve to implement a rate hike sooner rather than later.

In turn, AUD/USD may continue to exhibit a bearish trend in 2022 amid the deviating paths between the RBA and Federal Open Market Committee (FOMC), but the recent rebound in the exchange rate may continue to alleviate the tilt in retail sentiment like the behavior seen earlier this year.

Image of IG Client Sentiment for AUD/USD rate

The IG Client Sentiment report shows 64.61% of traders are currently net-long AUD/USD, with the ratio of traders long to short standing at 1.83 to 1.

The number of traders net-long is 1.91% lower than yesterday and 11.86% lower from last week, while the number of traders net-short is 13.37% higher than yesterday and 34.99% higher from last week. The decline in net-long interest comes as AUD/USD trades to a fresh monthly high (0.7187), while the surge in net-short position has helped to alleviate the crowding behavior as 76.95% of traders were net-long the pair earlier this week.

With that said, recent price action raises the scope for a larger recovery in AUD/USD as it clears the opening range for December, but another pickup in US consumer prices may drag on the exchange rate as market participants brace for higher US interest rates.

AUD/USD Rate Daily Chart

Image of AUD/USD rate daily chart

Source: Trading View

  • Keep in mind, AUD/USD slipped to a fresh yearly low (0.6993) in December, which pushed the Relative Strength Index (RSI) into oversold territory, but a textbook buy signal has emerged as the oscillator climbs back above 30.
  • AUD/USD appears to have reversed ahead of the November 2020 low (0.6991) as it carves a series of higher highs and lows, but need a close above the Fibonacci overlap around 0.7130 (61.8% retracement) to 0.7180 (61.8% retracement) to bring the 0.7260 (38.2% expansion) region on the radar.
  • Need a move above the 50-Day SMA (0.7312) to open up the 0.7370 (38.2% expansion) region, with the next area of interest coming in around 0.7440 (23.6% expansion).
  • However, lack of momentum to close above 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) region, with a break of the November 2020 low (0.6991) bringing the 0.6940 (78.6% expansion) area on the radar.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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