AUD/USD forms bearish flag after hawkish RBA interest rate decision

The AUD/USD pair rose slightlyafter the RBA released its interest rate decision. The pair also rose because of the overall US dollar weakness.

AUD/USD rises slightly after RBA interest rate decision

The RBA left interest rates unchanged when it concluded its two-day meeting today. It left the base lending rate at a record low of 0.25%, as was widely expected. Additionally, the bank said that it has started reducing the size of its quantitative easing program, which have totalled around $50 billion. Still, Philip Lowe said that the bank was ready to scale up these purchases when needed.

According to the RBA, the Australian economy is going through a difficult period, with output expected to fall by 10% in the first half of the year. The bank expects the unemployment rate to peak at around 10% while inflation will remain below the target of 2%. According to Lowe:

“Given this outlook, the Bank will maintain its efforts to keep funding costs low in Australia and credit available to households and businesses. The Board is committed to do what it can to support jobs, incomes and businesses during this difficult period and to make sure that Australia is well placed for the expected recovery.”

RBA actions to support the economy

As with other global central banks, the RBA has been at work to support the economy during the pandemic. It has brought interest rates to near zero, initiated its first quantitative easing, provided term funding facility to help banks lend to businesses, and provided liquidity in the market.

Low interest rates are important in supporting an economy in crisis because it encourages spending and reduces the cost of borrowing by businesses. On the other hand, low interest rates hurt savers and banks, which have to content with low returns from lending.

The RBA became the latest bank to embrace quantitative easing in March. The bank said that it would purchase government bonds with the goal of maintaining the 3-year bond yield at around 0.25%. It is doing this by acquiring billions-worth of bonds in the secondary market.

Further, the bank has provided billions of dollars to banks to help them lend money to companies. In the March meeting, Philip Lowe said that the amount of this facility would be worth about $90 billion. The banks are receiving these funds at a 0.25% interest rate.

The RBA decision came a week after the European Central Bank (ECB), Federal Reserve, and Bank of Japandelivered their rates decision. The three banks left rates unchanged and pledged to continue supporting the economy throughout the pandemic.

Meanwhile, the Australian government too has been supporting businesses. According to economists, these actions will lead to a significant debt burden. Some economists see the government borrowing more than $850 billion by 2023. This is equivalent to 23% of the GDP and is mostly because of the government’s measures to contain the virus.

Australia starts to recover

As with all countries, the pandemic has hit the Australian economy hard. Data released by Markit earlier today showed that services PMI declined to a record low of 19.5 from the previous 38.5. The report said that job losses in the sector fell in April as businesses closed. As a result, the Commonwealth composite PMI declined to a record low of 21.7 from the previous 39.4. The report said:

“Finally, input prices fell for the first time in the four-year series history during April, driven by a combination of factors, including pay cuts, rental reductions and lower fuel and energy prices. This provided room for firms to lower selling prices markedly in an effort to retain customers.”

Still, analysts are optimistic that the country will recover. According to media reports, many retailers in Australia such as Myer, Adairs, and Kathmandu have already started opening some of their stores. Also, more Australians are going to the beach and many manufacturers have started to reopen. This means that the economy will start to recover barring any second wave of the virus.

AUD/USD technical analysis: bearish flag developing

On the four-hour chart, we see that the AUD/USD pair dropped to a low of 0.6364 yesterday. This price was slightly above the 23.6% Fibonacci retracement level. The pair has also been moving upwards thereby forming a bearish flag pattern. Therefore, it is possible that the AUD/USD pair will resume the downward trend as bears attempt to retest the 23.6% Fibonacci retracement level at 0.6325.

On the flip side, a move above last week’s high of 0.6565 will invalidate this trend because it will send a signal that there are more buyers in the market.