The Reserve Bank of Australia will unlikely halt its monetary policy tightening cycle. Combined with the improving global economy and high global risk appetite, the outlook for the AUD/USD pair appears bullish. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The RBA raised the cash rate from 3.65% to 3.85%.
- The cycle of monetary tightening will continue.
- The S&P 500 index’s recovery helped the Australian dollar.
- Long positions on the AUD/USD pair can be opened on a breakout of 0.706.
Weekly Fundamental Forecast for Australian Dollar
Has the Australian dollar passed the test? The collapse in precious metal prices and the Reserve Bank’s key rate hike have become a stress test for the AUD/USD pair. The aussie has long been known as a commodity currency, and the sell-off in gold could have undermined hedge funds’ confidence in holding longs at their highest level since December 2017. The same goes for the start of the monetary tightening cycle, which could have triggered the “buy the rumor, sell the news” principle.
AUD/USD Performance and Speculative Positions on Australian Dollar
Source: Bloomberg.
If the RBA had not raised the cash rate, it would have signaled that it was comfortable with inflation. However, that was not the message it wanted to send. This is how Michele Bullock explained the first monetary policy tightening among developed countries.
The RBA left room for maneuver, stating that it would focus on quarterly rather than monthly consumer price data. As a result, the futures market no longer expects the cycle to continue in March, but only in May. The chances of a hike in the first month of spring are estimated at 16%, and in the last month at 85%.
However, Westpac believes that a cash rate hike from 3.85% to 4.15% at the next Reserve Bank meeting should not be ruled out. The upward revision of CPI forecasts indicates that the current inflation rate is unacceptable to the regulator.
RBA Forecasts for Australian Inflation
Source: Bloomberg.
The RBA’s monetary restriction is far from the only reason for a pullback in the AUD/USD pair. Not only precious metals but also stock indices fell victim to investors’ panic selling. The S&P 500 index saw a three-day decline amid fears that AI would undermine the position of software companies. The Australian dollar is perceived as a high-yield currency, so the deterioration in global risk appetite forced it to retreat.
Investors turned their attention to the greenback as gold sell-offs forced them to ponder whether the precious metal had lost its safe-haven status. Its gradual recovery and the S&P 500’s fastest daily rally since May marked the end of the AUD/USD’s retreat. The pair is poised to resume its uptrend.
While the RBA will raise rates, its counterparts in Europe and the US intend to keep them unchanged or even lower them. The acceleration of the US and Japanese economies, driven by fiscal stimulus and AI solutions, combined with Europe’s and China’s resilience to tariffs, suggests an improvement in global risk appetite.
Weekly AUDUSD Trading Plan
Against this backdrop, the AUD/USD rally is likely to continue towards the previously announced target of 0.72. Short-term sales after the cash rate hike generated profits, and the trend reversed. Long positions can be increased if the price breaks through the resistance level of 0.706.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of AUDUSD in real time mode
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