AUD/USD: RBA's Hawks Give Aussie Wings

By: Andrei Tratseuski

After Reserve Bank of Australia left the interest rates at bay of 4.5%, the Aussie rose abruptly. Hawkish tone rang through during the announcement sparking a rally in the Aussie. The central bank warned that increase in commodity prices along with a robust growth in the economy may spark inflation. The greatest fear of the central bankers in “The Land Down Under” is the rapid escalation in wages. RBA predicts that inflation will push to the upper range of 2 to 3 percent target band. With GDP growing at a rate of 3.5 percent and unemployment dipping to 5.2 percent, there is enormous amount of room for the RBA to hike its interest rates. Some of the traders are predicting a rate hike as soon as the next month. Economists, in the meantime, predict the interest rates to reach as high as 5.00% by the end of the year. Volatile conditions in the Euro, which kept the interest rates stationary around the world are beginning to get unwind. In terms, the Reserve Bank may have an ability to conquest the inflation before it becomes an underlining problem. China remains the biggest driver of the Australian economy due to the underlying demand of raw materials. Therefore as long as demand factor remains intact price pressures will continue to be present in the economy.

Looking at the technical indicators of the price action, we notice a prominent double bottom on hourly charts. A double bottom support of 0.8300, acted as a “Chinese Wall” to a downward slide. The Aussie, after stalling at 0.8300, reversed violently and rose to a current level. We predict the pair to have legs to reach 0.8600, in the near term future due to unprecedented upward rally. However, there lies future resistance at 0.8600. First off, 61.8% retracement of last week's high and this week's low hovers at the specified level. Furthermore, 20-day SMA moving average coincides at 0.8600. In summary, we expect the Aussie to continue appreciating for the remainder of the day, (taking away extremely poor reading of US ISM Non-manufacturing), with resistance coming to play at 0.8600.