AUD / USD Outlook Mired by Waning Bets for RBA Rate Hike in July

Australian Dollar Talking Points

AUD / USD consolidates within the June range as it manages to hold above the yearly low (0.6829), but the exchange rate may face headwinds ahead of the Reserve Bank of Australia (RBA) interest rate decision on July 5 as the central bank tames speculation for another 50bp rate hike.

AUD / USD Outlook Mired by Waning Bets for RBA Rate Hike in July

AUD / USD fails to extend the series of higher highs and lows from last week’s low (0.6869) on the back of US Dollar strength, and the Greenback may continue to outperform its Australian counterpart as Governor Philip Lowe acknowledges that “like other countries, we’re having to raise interest rates and there are uncertainties around how that’s going to affect the economy.”

As a result, Governor Lowe went onto say that the central bank is “on a narrow path back to low inflation” while speaking at an event held by UBS, with the central bank head emphasizing that the benefits of meeting every four-weeks is that the RBA is able to “take stock of information at a very high frequency basis and are able to respond to the changing circumstances.”

The comments suggest the RBA will move to the sidelines after delivering a 50bp rate hike for the first time since 2000 as the minutes from the June meeting reveal that “over the preceding couple of decades, increases in the cash rate had typically occurred in 25 basis point increments”And waning speculation for a further shift in monetary policy may drag on the Australian Dollar as the ASX RBA Rate Indicator now shows a“64% expectation of an interest rate increase to 1.50% at the next RBA Board meeting.

Image of ASX RBA Rate Indicator

Keep in mind, the indicator showed an 80% chance for a July RBA rate hike during the previous week, and the different approaches between the RBA and Federal Reserve may keep AUD / USD under pressure in the second half of 2022 as Chairman Jerome Powell and Co. show a greater willingness to implement a restrictive policy.

In turn, the consolidation in AUD / USD may end up being temporary with the Federal Open Market Committee (FOMC) on track to implement higher interest rates over the coming months, but a further decline in the exchange rate may fuel the tilt in retail sentiment like the behavior seen earlier this year.

Image of IG Client Sentiment for AUD / USD rate

The IG Client Sentiment report shows 72.78% of traders are currently net-long AUD / USD, with the ratio of traders long to short standing at 2.67 to 1.

The number of net-long traders is 0.49% higher than yesterday and 10.61% higher than last week, while the number of net-long traders is 3.56% lower than yesterday and 0.37% lower than last week. The rise in net-long interest has fueled the crowding behavior as 70.46% of traders were net-long AUD / USD earlier this month, while the decline in net-short position comes as the exchange rate appears to be stuck in the June range.

With that said, AUD / USD may consolidate going into the end of the month if it manages to hold above the yearly low (0.6829), but waning expectations for a July RBA rate hike may produce headwinds for the exchange rate as the FOMC forecasts a higher trajectory for the Fed Funds rate.

AUD / USD Rate Daily Chart

Image of AUD / USD rate daily chart

Source: Trading View

  • AUD / USD appears to be stuck in the June range as it holds above the yearly low (0.6829)and the exchange rate may continue to consolidate, with a move above the 0.6940 (78.6% expansion) region raising the scope for a move towards the 50-Day SMA (0.7058).
  • However, AUD / USD may continue to track the negative slope in the moving average as it struggles to push back above the 0.6940 (78.6% expansion) regionwith a break of the monthly low (0.6850) bringing the Fibonacci overlap around 0.6770 (38.2% expansion) to 0.6820 (50% retracement) back on the radar, which largely lines up with the yearly low (0.6829).
  • A break / close below the overlap around 0.6770 (38.2% expansion) to 0.6820 (50% retracement) opens up the June 2020 low (0.6648), with the next area of ​​interest coming in around 0.6510 (38.2% retracement) to 0.6520 (38.2% expansion).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

Leave a Comment