AUD/USD forecast: signal as the Fed and RBA diverge

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on  Aug 21, 2024
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  • The AUD/USD pair has risen for three consecutive weeks.
  • The Reserve Bank of Australia has pointed to a rate hike this year.
  • The Federal Reserve is expected to cut interest rates in September.

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The Australian dollar, popularly known as the Aussie, has gone on a strong bull run against the US dollar as the two central banks diverge. The AUD/USD pair has risen for four consecutive days, reaching a high of 0.6750, its highest level since July 17th. It has soared by more than 6.27% from its lowest point this month.

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The Aussie has also bounced back against other currencies, with the AUD/GBP rising to 0.5181, 3.90% above its monthly low. Similarly, the AUD/JPY and AUD/EUR have risen to 98 and 0.60, respectively.

Dovish Federal Reserve

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The main reason why the AUD/USD has rallied is because of the weak US dollar. The closely watched US dollar index has tumbled to $101.51 and formed a death cross, meaning that it has more downside. 

Latest data shows that the US dollar has dropped against most currencies like the euro, sterling, South African rand, and others from 

This price action is mostly because the Federal Reserve has turned dovish in the past few meetings. In its July 31 meeting, the bank left rates unchanged at between 5.25% and 5.50% and hinted that it would start cutting rates in its September meeting.

More economic data have shown why a Fed rate cut is necessary. While US inflation remains high, the annual rate fell from 3.0% in June to 2.9% in July, and this trend may continue.

Another report showed that the country’s unemployment rate has risen in the past few months. It rose to 4.3% in July, the highest level in years and a big increase from last year’s low of 3.5%. 

Additionally, manufacturing and industrial production continued falling in July. The two sectors have been in a contraction mode even after Joe Biden spent billions of dollars in stimulus to boost the sector. 

A recent report showed that many recipients of Biden’s Inflation Reduction Act (IRA) have delayed or ended their plants. For example, VinFast, which building an EV plant in South Carolina, has delayed the plant to 2027. 

Therefore, while recession risks have retreated, there are chances that the Fed will want to avoid the situation from getting worse. It will do that by slashing interest rates in September.

CME futures estimate that the bank will cut rates by 0.25% in this meeting now that the US released strong retail sales data. 

In most cases, the US dollar retreats when the Federal Reserve is cutting rates. For example, the DXY index tumbled to $89.9 in 2021 as the bank brought rates to zero as it dealt with the Covid-19 pandemic. 

RBA has been hawkish

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In Australia, inflation has remained at an elevated level, helped by the persistent wage growth in the country. 

The most recent data showed that the country’s headline Consumer Price Index (CPI) rose from 3.6% in Q1 to 3.8% in Q2. The closely watched trimmed and weighted mean inflation figure dropped slightly during the quarter.

These numbers remained much higher than the RBA’s target of 2.0%. Therefore, the bank has hinted that it will maintain higher rates for longer than expected. 

Minutes released this week showed that officials deliberated hiking interest rates in the last meeting but decided to leave them intact. 

Michele Bullock, the RBA governor, has insisted that the bank may still decide to hike interest rates this year since it expects inflation to take longer to hit the 2% target. The RBA also believes that premature cuts will lead to more inflation as the country prepares for the next general election in May. 

The RBA’s stand is different from that of other central banks that have started cutting rates. Some of the most notable ones are the European Central Bank (ECB), Bank of England (BoE), and the Swiss National Bank (SNB).

A key risk for the AUD/USD pair is that the Chinese economy is softening, leading to lower prices of key commodities like iron ore, copper, and coal. China is Australia’s biggest trading partner.

AUD/USD technical analysis

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aud/usd

AUD/USD chart by TradingView

Turning to the weekly chart, we see that the AUD to USD pair has bounced back in the past three consecutive weeks. It has risen from this month’s low of 0.6347 to a high of 0.6745. 

The pair has formed an inverse head and shoulders pattern, a popular bullish sign. It has also jumped above the 50-week and 25-week moving averages, meaning that bulls are in control.

Therefore, the path of the least resistance for the pair is bullish, with the next important reference level to watch being at 0.6862, its highest swing in January this year. A move above that level will lead to more gains as bulls target the resistance at 0.7153, its highest point in 2023.