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AUD/USD Risks Further Losses on Dovish RBA, Bearish RSI Formation

David Song

DailyFX.com -

- Reserve Bank of Australia (RBA) to Hold Official Cash Rate at Record-Low of 1.50%.

- Will Governor Philip Lowe Show Increased Concern for Low Price/Wage Growth


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Trading the News: Reserve Bank of Australia (RBA) Interest Rate Decision

The Reserve Bank of Australia (RBA) interest rate decision may generate limited interest as Governor Philip Lowe and Co. are widely expected to keep the official cash rate at the record-low of 1.50%, but the fresh batch of central bank rhetoric may weigh on the AUD/USD exchange rate should the central bank highlight a dovish outlook for monetary policy.


What’s Expected:

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Why Is This Event Important:

The RBA may sound more cautious this time around as officials warn ‘the increase in consumption growth was expected to be limited given the forecast for subdued growth in household incomes,’ and Governor Lowe may show a greater willingness to further support the real economy as ‘the factors that had weighed on inflationary pressures could be more persistent than had been assumed.’ In turn, the RBA may continue to tame interest-rate expectations, with aussie-dollar at risk of giving back the advance from earlier this year especially as the Federal Reserve appears to be on course to deliver a March rate-hike.


Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Trade Balance (JAN)

A$3.800B

A$1.302B

Wage Price Index (YoY) (4Q)

1.9%

1.9%

Consumer Price Index (YoY) (4Q)

1.6%

1.5%

Subdued wage growth accompanied by the slowdown in global trade encourage the RBA to adopt a more dovish tone in March, and the Australian dollar stands at risk of facing near-term headwind should the central bank open the door to further embark on its easing-cycle.


Risk: Bullish Argument/Scenario

Release

Expected

Actual

Retail Sales (MoM) (JAN)

0.4%

0.4%

Gross Domestic Product s.a. (QoQ) (4Q)

0.8%

1.1%

Employment Change (JAN)

10.0K

13.5K

However, the ongoing improvement in the labor market may push the RBA to highlight an improved outlook for the region, and the policy statement may spark a bullish reaction in the higher-yielding currency should Governor Lowe & Co. talk down bets for additional monetary support.


For More Updates, Join DailyFX Currency Analyst David Song for LIVE Analysis!


How To Trade This Event Risk(Video)

Bearish AUD Trade: Governor Lowe & Co. Adopts Dovish Outlook for Monetary Policy

  • Need red, five-minute candle following the announcement for a short AUD/USD trade.
  • If market reaction favors a bearish aussie position, sell AUD/USD with two separate lots.
  • Set stop at the near-by swing high/reasonable distance from entry; look for at least 1:1 risk-to-reward.
  • Move stop to breakeven on remaining position once initial target is met, set reasonable limit.


Bullish AUD Trade: RBA Shows Greater Willingness to Move Away From Easing-Cycle

  • Need green, five-minute candle to consider a long aussie position.
  • Carry out the same setup as the bearish AUD trade, just in the opposite direction.


If you’re looking for trading ideas, check out our Trading Guides.


Potential Price Targets For The Release

AUD/USD Daily

AUD/USD Daily Chart

Chart - Created Using Trading View

  • Failure to preserve the near-term holding pattern raises the risk for a further decline in AUD/USD especially as the Relative Strength Index (RSI) turns ahead of overbought territory and starts to carve a bearish formation; will watch the former support zone around 0.7650 (382.% retracement) for new resistance, with the next downside hurdle coming in around 0.7530 (38.2% expansion) followed by 0.7500 (50% retracement).
  • Interim Resistance: 0.7730 (61.8% retracement) to 0.7770 (61.8% expansion)
  • Interim Support: 0.7150 (161.8% expansion) to 0.7180 (61.8% retracement)


Impact that theRBA interest rate decision has had on AUD/USD during the previous meeting

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

FEB

2016

02/07/2016 03:30 GMT

1.50%

1.50%

+32

-17

February 2017 Reserve Bank of Australia (RBA) Interest Rate Decision

AUD/USD 5-Minute

AUD/USD Chart

As expected, the Reserve Bank of Australia (RBA) held the benchmark interest rate at the record-low of 1.50%, but Governor Philip Lowe & Co. sounded a bit more optimistic this time around, with the central bank noting ‘the improvement in the global economy has contributed to higher commodity prices, which are providing a boost to Australia's national income.’ Nevertheless, it seems as though the RBA is in no rush to remove the accommodative policy stance as ‘the rise in underlying inflation expected to be a bit more gradual,’ and the central bank may largely endorse a wait-and-see approach throughout the year after delivering two rate-cuts in 2016. The Australian dollar tracked higher following the upbeat tone, but the market reaction was short-lived, with AUD/USD slipping back below the 0.7650 region to end the day at 0.7627.


Read More:

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Technical Weekly: EUR/USD Long Term Chart Conditions Refresher

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March Forex Seasonality Sees Neutral Month for USD After February Rebound


--- Written by David Song, Currency Analyst


To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.


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