AUD/USD Rate Eyes Yearly Low Ahead of Australia GDP Report

Australian Dollar Talking Points

AUD/USD trades to a fresh monthly low (0.6728) after showing a limited reaction to the Reserve Bank of Australia (RBA) interest rate decision, and the exchange rate may attempt to test the yearly low (0.6681) as it reverses ahead of the monthly high (0.6855).

AUD/USD Rate Eyes Yearly Low Ahead of Australia GDP Report

AUD/USD trades to a fresh monthly low (0.6731) on the back of US Dollar strength, and it seems as though developments coming out of the Australia will do little to influence the exchange rate as the RBA increase the official cash rate (OCR) by another 50bp.

Nevertheless, the update to Australia’s Gross Domestic Product (GDP) report may keep the RBA on track to implement higher interest rates as the economy is expected to grow 3.5% in the second quarter of 2022 after expanding 3.3% per annum during the previous period, and an uptick in the growth rate may curb the recent decline in AUD/USD as it puts pressure on the central bank to step up its effort in combating inflation.

As a result, the RBA may adjust the forward guidance over the coming months as the central bank insist that monetary policy is “not on a pre-set path,” and it remains to be seen if Governor Philip Lowe and Co. will implement larger rate hikes later this year as “the Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”

However, the RBA may retain its current approach in normalizing monetary policy as the central bank strives to keep the “economy on an even keel,” and AUD/USD may largely track the negative slope in the 200-Day SMA (0.7118) as the Federal Reserve prepares US households and businesses for a restrictive policy.

In turn, AUD/USD may struggle to hold its ground ahead of the next Federal Open Market Committee (FOMC) interest rate decision on September 21, and a near-term decline in the exchange rate may fuel the tilt in retail sentiment like the behavior seen earlier this year.

The IG Client Sentiment report shows 70.54% of traders are currently net-long AUD/USD, with the ratio of traders long to short standing at 2.39 to 1.

The number of traders net-long is 6.97% higher than yesterday and 40.73% higher from last week, while the number of traders net-short is 2.09% lower than yesterday and 17.03% lower from last week. The jump in net-long interest has fueled the crowding behavior as 63.42% 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 (0.6728).

With that said, Australia’s GDP report may curb the recent weakness in AUD/USD as the update is anticipated to show an uptick in the growth rate, but the exchange rate may attempt to test the yearly low (0.6681) as it reverses ahead of the monthly high (0.6855).

AUD/USD Rate Daily Chart

Source: Trading View

• AUD/USD trades to fresh monthly low (0.6728) as it struggles to hold above the 0.6760 (50% retracement) to 0.6770 (100% expansion) region, and the exchange rate may fall towards the June 2020 low (0.6648) if it fails to defend yearly low (0.6681).
• At the same time, a move below 30 in the Relative Strength Index (RSI) is likely to be accompanied by a further decline in AUD/USD like the price action seen earlier this year, with the next area of interest coming in around 0.6460 (61.8% retracement) to 0.6520 (38.2% expansion).
• However, lack of momentum to test the yearly low (0.6681) may push AUD/USD back above the 0.6760 (50% retracement) to 0.6770 (100% expansion) region, with a move above the 50-Day SMA (0.6897) opening up the 0.6940 (78.6% expansion) area.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong