Bearish view
- Sell the AUD/USD pair and set a take-profit at 0.6400.
- Add a stop-loss at 0.6575.
- Timeline: 1-2 days.
Bullish view
- Set a buy-stop at 0.6475 and a take-profit at 0.6525.
- Add a stop-loss at 0.6400.
The AUD/USD exchange rate suffered a harsh reversal after the strong US inflation numbers pushed more analysts to scale back their rate cut expectations. The pair plunged to a low of 0.6450, its lowest point since November 2023. It has retreated by about 6% from the YTD high.
Fed rate cuts hope dim
The main reason why the AUD/USD pair retreated is that the US has published strong inflation and jobs numbers recently. Earlier this month, data revealed that the economy added over 350k jobs in January while the unemployment rate remained at 3.7%. That was one part of the Fed’s dual mandate.
And on Tuesday, data by the Bureau of Labor Statistics (BLS) revealed that the country’s inflation remained red hot in January. The headline Consumer Price Index (CPI) rose from 0.2% in December to 0.3% in January, higher than the median estimate of 0.2%.
The inflation figure rose by 3.1% on a YoY basis, also higher than the expected 2.9%. Core inflation also rose by 0.4% and by 3.9% on a MoM and YoY, respectively. These numbers mean that inflation is much higher than what analysts were expecting.
They also mean that the Fed has no reason to start cutting interest rates any time soon. As a result, economists have now reduced their expectations of cuts to about 4 from the previous five. The first rate cut is expected to come in June.
Therefore, the AUD/USD pair plunged since economists expect that the US interest rates wil remain higher than those in Australia for a while. US rates are between 5.25% and 5.50% while in Australia remains at 4.35%. As such, this has become a good carry trade. There will be no major economic data from the US and Australia.
AUD/USD technical analysis
The AUD/USD pair continued its strong downward trend after the strong US inflation data. On the daily chart, it has slipped below the key support level at 0.6468, its lowest swing on February 5th. The 25-day and 50-day EMAs have formed a bearish crossover pattern while the MACD and the Percentage Price Oscillator (PPO) have all retreated.
The exchange rate has also flipped the support at 0.6465, its lowest swing on May 31st. Therefore, the path of the least resistance for the pair is bearish. This means that it could slip to the key psychological point at 0.6400.
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