AUD/USD ANALYSIS & TALKING POINTS

• Fed’s peak rate drops below 5% post-Powell.
• China’s looks to ease COVID constraints, giving commodities and AUD a boost.
• Technical analysis suggestive of possible reversal.

AUSTRALIAN DOLLAR FUNDAMENTAL BACKDROP

The pro-growth Australian dollar has rallied on the back of a risk-on global market environment. Fed Chair Jerome Powell kicked things off last night with a neutral/dovish statement which did not show signs of pushback to the recent ‘Fed pivot’ narrative. Some highlights of the speech included avoidance of overtightening, a 50bps interest rate hike in December and achieving a soft landing. This goes against their what seemed to be their primary objective of combating inflation for some time. Post-address the peak rate in 2023 has now dropped below 5% to 4.933% in May (see table below).

FEDERAL RESERVE INTEREST RATE PROBABILITIES

Source: Refinitiv

Naturally, the USD slipped against most currencies with the AUD benefitting more so after China announced the removal of all restrictions in Guangzhou. Other provinces are also showing gradual signs of easing while Vice Premier Sun Chunlan stated that “China is looking to speed up the elimination of large-scale lockdowns”. In addition, Chinese Caixin manufacturing PMI data beat estimates which is helpful for the broader commodity complex and considering Australia’s close ties with China as their primary buyer of commodities, the AUD saw added support.

Australian manufacturing PMI on the other hand failed to match estimates but the external backdrop mentioned above has overshadowed this data as markets look ahead to the key core PCE deflator (Fed’s preferred measure of inflation) release later this afternoon. Should actual data print in line with estimates (5%) there could be further Aussie strength but anything higher could push against Mr. Powell’s speech leaving room for the greenback to find some bids.

ECONOMIC CALENDAR

Source: DailyFX economic calendar

TECHNICAL ANALYSIS

AUD/USD DAILY CHART

Chart prepared by Warren Venketas, IG

Daily AUD/USD price action shows the sharp appreciation in for the AUD now slightly above the psychological 0.6800 support handle. Today’s long upper wick (should this hold), may indicate a reversal to the downside as the emerging rising wedge pattern (black) traditionally points to impending downside. Bulls could invalidate this pattern if wedge resistance is broken, exposing the 0.6916 swing high, coinciding with the 200-day SMA (blue).

The Relative Strength Index (RSI) exhibits slowing bullish momentum creating what is known as bearish divergence whereby price action opposes the fading RSI (red). Bearish divergence often leads to consequent downside and adds to the bearish disposition shown by other technical aspects outlined above.

Key resistance levels:

• 0.7000
• 0.6916/200-day SMA

Key support levels:

• 0.6800
• 0.6700

IG CLIENT SENTIMENT DATA: MIXED

IGCS shows retail traders are currently LONG on AUD/USD, with 51% of traders currently holding long positions. At DailyFX we typically take a contrarian view to crowd sentiment but recent changes in long and short positioning result in a short-term cautious bias.

Contact and followWarrenon Twitter:@WVenketas