Bearish view
- Sell the AUD/USD pair and set a take-profit at 0.6550.
- Add a stop-loss at 0.6650.
- Timeline: 1-2 days.
Bullish view
- Set a buy-stop at 0.6615 and a take-profit at 0.6700.
- Add a stop-loss at 0.6550.
The AUD/USD pair was flat on Thursday morning as the market digested the hawkish Fed decision and the encouraging Australian inflation data. The pair initially dropped to a low of 0.6560 on Wednesday and then rebounded to 0.6615 after the Fed decision.
Fed decision and Australia inflation
The Australian Bureau of Statistics (ABS) published encouraging inflation data on Wednesday. The headline Consumer Price Index (CPI) retreated from 5.4% in Q3 to 4.1% in Q4. It also retreated from 1.2% to 0.6% on a MoM basis.
Additionally, the trimmed and weighted mean CPI figures dropped to 4.2% and 4.3%, respectively. Therefore, while these figures are much higher than the Reserve Bank of Australia (RBA) target of 2.0%, they are heading in the right direction.
Therefore, the expectation is that the RBA will leave interest rates unchanged in its next meeting. It will also commit to holding them in this level as it observes the state of inflation and economic growth.
One of the biggest risks for Australia is that China, its biggest trading partner, is not doing well. Manufacturing activity is in contraction mode, house prices have plunged, while the stock market has continued to retreat.
The AUD/USD pair also reacted mildly to the hawkish pause by the Fed. In its first meeting of the year, the Fed decided to leave rates intact between 5.25% and 5.50%. It also warned that it was not ready to start cutting rates.
Instead, it maintained that it will continue being data-dependent when deciding to cut interest rates. The recent economic numbers mean that the Fed has no hurry to start cutting rates since inflation remains above 2% while the economy is still strong.
The next key data to watch will be the upcoming US NFP data set for Friday. These numbers will provide more details about the state of the economy. A report by ADP showed that the private sector created 107k jobs in December.
AUD/USD technical analysis
The AUD/USD exchange rate has remained in a narrow range since January 16th. In this period, the pair has remained inside the ascending green channel. This channel is part of a bearish flag pattern, a popular continuation sign. It has continued to consolidate at the 50-period and 25-period moving averages. The Average Directional Index (ADX) has continued falling, signaling that there is no trend.
Therefore, the pair will likely have a bearish breakout in the coming days. Therefore, the outlook for the pair is still bearish, with the next point to watch being the lower side of the channel at 0.6550.
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