Bullish view
- Buy the AUD/USD pair and set a take-profit at 0.6585.
- Add a stop-loss 0.6475.
- Timeline: 1-2 days.
Bearish view
- Sell the AUD/USD pair and set a take-profit at 0.6475.
- Add a stop-loss at 0.6585.
The AUD/USD exchange rate bounced back as signs of a divergence between the Federal Reserve and the Reserve Bank of Australia (RBA) rose. It rallied to a high of 0.6540, higher than Monday’s low of 0.6348.
RBA and Fed divergence
The Australian dollar rose after the Reserve Bank of Australia delivered its August interest rate decision. In a statement, the bank left interest rates unchanged at 4.35% for the seventh consecutive meeting.
The bank maintained a hawkish tone, noting that interest rates will remain at a restrictive level for a while since inflation is still elevated. A report released last week showed that the headline Consumer Price Index (CPI) rose from 3.6% in Q1 to 3.8% in Q2.
While the trimmed and weighted mean CPI numbers retreated, they remain above the RBA’s target of 2.0%.
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The RBA’s stance is different from that of the Federal Reserve last week, the Fed decided to leave interest rates unchanged. It also left the door open for a rate cut in September. Some analysts are recommending a jumbo rate cut of 0.50% while others believe that a 0.75% cut would be appropriate.
A key concern is that the labor market has softened and that it could trigger a recession later this year. The non-farm payrolls (NFP) data showed that the unemployment rate rose to 4.3%, the highest level since 2021. Initial and continuing jobless claims have also risen in the past few months.
Therefore, the swap market is now pricing in a rate cut in September while most analysts expect the RBA to slash them in the first quarter of 2025.
AUD/USD technical analysis
The AUD/USD pair slumped to a low of 0.6350 on Monday, partly because of the unwinding of the Japanese yen carry trade. It then formed a hammer pattern, which is characterized by a long lower shadow and a small body with no upper wick.
The percentage price oscillator, which is a unique form of MACD, has formed a bullish crossover pattern. The pair remains slightly below the 61.8% Fibonacci Retracement point and the Ichimoku cloud indicator.
Therefore, because of the hammer candle and the Fed and RBA divergence, the pair will likely continue rising as buyers target the 50% retracement point at 0.6585.
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