AUD/USD Rate Snaps Five Day Rally with RSI Tracking Downward Trend

Australian Dollar Talking Points

The recent rebound in AUD/USD appears to be stalling after posting its longest stretch of gains since August 2020, and the advance from the yearly low (0.7477) may unravel over the remainder of the month as the Relative Strength Index (RSI) continues to track the downward trend established in May.

AUD/USD Rate Snaps Five Day Rally with RSI Tracking Downward Trend

AUD/USD bounces along the 200-Day SMA (0.7557) after gapping lower at the start of the week, but it remains to be seen if the decline from the February high (0.8007) will turn out to be a correction in the broader trend or a change in market behavior amid the deviating paths between the Federal Reserve and the Reserve Bank of Australia (RBA).

Remarks from Boston Fed President Eric Rosengren, who votes on the Federal Open Market Committee (FOMC) in 2022, suggests the central bank will start to discuss an exit strategy in the second half of 2021 as the official insists that “it’s quite likely that the ‘substantial further progress’ criteria, at least in my own personal view, will likely be met prior to the beginning of next year.”

As a result, a growing number of Fed officials may show a greater willingness taper the quantitative easing (QE) program over the coming months, while the RBA appears to be on a preset course as Governor Philip Lowe and Co. pledge to“not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range.”

In a recent speech, Assistant Governor Luci Ellis emphasized that “the big question for the outlook is whether the recovery is simply a snap-back to prior patterns of activity, or whether there is some make-up from the lost growth,” and it seems as though the RBA will retain a wait-and-see approach at its next interest rate decision on July 6 as “the Board remains committed to maintaining highly supportive monetary conditions.”

Until then, AUD/USD remains vulnerable as it slipped below the 200-Day SMA (0.7557) for the first time since June 2020, and the recent shift in retail sentiment may coincide with a further decline in the exchange rate like the behavior seen earlier this year.

The IG Client Sentiment report shows 50.81% of traders are currently net-long AUD/USD, with the ratio of traders long to short standing at 1.03 to 1.

The number of traders net-long is 4.51% higher than yesterday and 20.32% lower from last week, while the number of traders net-short is 16.47% higher than yesterday and 49.81% higher from last week. The decline in net-long position comes as AUD/USD snaps a five day rally, while the sharp rise in net-short has alleviated the recent shift in retail sentiment as 66.01% of traders were net-long the pair at the start of last week.

With that said, the weakness in AUD/USD may coincide with the recent shift in retail sentiment like the behavior seen earlier this year, and the advance from the yearly low (0.7477) may unravel over the remainder of the month as the Relative Strength Index (RSI) continues to track the downward trend established in May.

AUD/USD Rate Daily Chart

Source: Trading View

• Keep in mind, a head-and-shoulders formation took shape earlier this year as AUD/USD traded to a fresh 2021 low (0.7532) in April, but the exchange rate negated the key reversal pattern following the failed attempts to close below the neckline around 0.7560 (50% expansion) to 0.7570 (78.6% retracement).
• However, AUD/USD has dipped below the 200-Day SMA (0.7557) for the first time in over a year, with the decline in the exchange rate pushing the Relative Strength Index (RSI) into oversold territory for the first time since March 2020.
• The rebound from the fresh 2021 low (0.7477) appears to be stalling amid the lack of momentum to push back above the 0.7620 (38.2% retracement) to 0.7640 (38.2% retracement) region, with another move below the 0.7560 (50% expansion) to 0.7570 (78.6% retracement) area, which lines up with the 200-Day SMA (0.7557), opening up the Fibonacci overlap around 0.7440 (23.6% expansion) to 0.7500 (50% retracement).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong