Bearish view
- Sell the AUD/USD pair and set a take-profit at 0.6490.
- Add a stop-loss at 0.6560.
- Timeline: 1-2 days.
Bullish view
- Set a buy-stop at 0.6545 and a take-profit at 0.6600.
- Add a stop-loss at 0.6480.
The AUD/USD pair continued its strong sell-off as signs of a divergence between the Federal Reserve and the Reserve Bank of Australia (RBA) emerged. The pair retreated to a multi-week low of 0.6505 as the focus shifted to the upcoming Fed decision.
RBA and Fed divergence
The RBA delivered a mildly dovish statement on Tuesday. In its second decision of the year, the RBA left interest rates unchanged at 4.35%, in line with its guidance and analysts’ estimates.
The bank slightly changed its statement, signalling that it was not thinking about rate hikes. Instead, the statement said that the bank was not ruling out anything when making its next interest rate decision.
Most analysts now expect that the RBA will deliver its first rate cut in its meeting in September. It will then deliver another cut in its December meeting in a bid to stimulate the economy. Officials hope that inflation will be approaching the target of 2.0% by then.
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The RBA differed from what the Bank of Japan did on Tuesday as it hiked rates by 0.10% for the first time in over 17 years.
Looking ahead, the Federal Open Market Committee (FOMC) will conclude its two-day meeting later on Wednesday. Economists expect that the Fed will deliver a hawkish pause, where it leaves interest rates unchanged and hinting that it will not be in a hurry to cut.
Several high-profile analysts have warned against a dovish turn by the Fed. In a statement, analysts at Vanguard argued that the Fed may not cut rates this year. In a separate statement, Ed Yardeni, a renowned economist, argued that there was no need for the Fed to slash rates.
The argument is that inflation is still high and is not falling quickly enough. For example, the core CPI remains above 3.8%, almost double the Fed’s target of 2.0%. Also, while the US economy is softening, it has avoided a recession.
AUD/USD technical analysis
In my last AUD/USD forecast, I warned that it might have a breakdown, thanks to the bearish flag pattern that has been forming. This analysis was accurate as the pair tumbled to its lowest level since March 6th.
It has now formed a small hammer pattern, a potential sign of a bullish reversal. This is likely a dead cat bounce as traders focus on the upcoming Fed decision. The pair has moved slightly above the first support of the Woodie pivot point.
Therefore, the likely scenario is where the pair rebounds to the lower side of the flag pattern at 0.6550 and then resumes the bearish trend. If this happens, it will likely retest the support at 0.6500.
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