AUD/USD Rate Outlook Hinges on RBA’s Forward Guidance for Policy

Australian Dollar Talking Points

AUD/USD attempts to breakout of the range-bound price action from last week as it comes up against the October high (0.7556), and the Reserve Bank of Australia (RBA) interest rate decision may fuel the recent advance in the exchange rate if the central bank adjusts the forward guidance for monetary policy.

AUD/USD Rate Outlook Hinges on RBA’s Forward Guidance for Policy

AUD/USD trades to a fresh yearly high (0.7556) as the commodity bloc currencies continue to outperform their major counterparts, and the Australian Dollar may attempt to retrace the decline from the June high (0.7775) as the 50-Day SMA (0.7267) establishes a positive slope.

Looking ahead, the RBA is expected to keep the official cash rate (OCR) at 0.10% in April as the board pledges to “not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range,” and more of the same from the central bank may rattle the recent rally in AUD/USD as the Federal Reserve plans to deliver a series of rate hikes over the coming months.

However, the RBA may prepare Australian households and businesses for a looming shift in monetary policy as Governor Philip Lowe acknowledges that “it is plausible that the cash rate will be increased later this year,” and a shift in the forward guidance may generate a near-term breakout in AUD/USD as it comes up against the October high (0.7556).

In turn, AUD/USD may attempt to retrace the decline from the June high (0.7775), but a further appreciation in the exchange rate may fuel the recent flip in retain sentiment like the behavior seen during the previous year.

The IG Client Sentiment report shows only 30.56% of traders are currently net-long AUD/USD, with the ratio of traders short to long standing at 2.27 to 1.

The number of traders net-long is 1.55% higher than yesterday and 5.31% higher from last week, while the number of traders net-short is 13.35% higher than yesterday and 11.23% higher from last week. The rise in net-long position comes as AUD/USD appears to be breaking out of a narrow range, while the jump in net-short interest suggests the crowding behavior will persist over the coming days as 30.76% of traders were net-long the pair last week.

With that said, the RBA rate decision may fuel the recent advance in AUD/USD if the central bank shows a greater willingness to switch gears, but failure to clear the October high (0.7556) may lead to a near-term pullback in the exchange rate as the Relative Strength Index (RSI) continues to hold below overbought territory.

AUD/USD Rate Daily Chart

Source: Trading View

• AUD/USD has come up against the October high (0.7556) as it trades above the 200-Day SMA (0.7296) for the first time since June 2021, with a break/close above the 0.7560 (50% expansion) to 0.7570 (78.6% retracement) area bringing the 0.7640 (38.2% retracement) region on the radar.
• Next area of interest comes in around 0.7720 (38.2% expansion) to 0.7740 (61.8% expansion) followed by the June high (0.7775), but lack of momentum to clear the October high (0.7556) may lead to a near-term pullback in AUD/USD as the recent rally in the exchange rate fails to push the Relative Strength Index (RSI)into overbought territory.
• Failure to hold above the 0.7440 (23.6% expansion) region may push AUD/USD back towards 0.7370 (38.2% expansion), with a move below the 200-Day SMA (0.7296) bringing the 0.7260 (38.2% expansion) area back on the radar.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong