The Aussie dollar continues to consolidate near the 50 SMA, with key U.S. inflation data having the potential to spark the pair’s next major move. Here are the crucial support and overhead areas to watch.
Following the Aussie dollar (AUD/USD) gaining ground late last week after a soft U.S. employment report cooled rate hike expectations, the pair trades mostly sideways early on Tuesday in the wake of the Reserve Bank of Australia (RBA) keeping interest rates on hold. Traders appear reluctant to position for a breakout or breakdown from a textbook rising wedge pattern on the pair’s chart, suggesting caution ahead of key U.S. inflation readings later this week.
RBA Decision Points to Cautious Inflation Outlook
The AUD/USD initially dipped following the RBA’s widely expected decision to keep interest rates on hold but has since steadied following the accompanying statement providing no new information about the central bank’s policy agenda.
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Later this week, the pair’s direction could be heavily influenced by U.S. inflation readings that may influence the Federal Reserve’s interest rate outlook. On Wednesday, the Bureau of Labor Statistics publishes consumer prices index (CPI) numbers, with traders likely to focus on the July core CPI print, which analysts expect to inch up by 0.2%, taking the annual inflation rate to 2.5%. Market participants will then on Thursday get another reading on inflation with the release of producer price data before July U.S. retail sales cap off the economic calendar on Friday.
Although last week’s softer employment data tempered more hawkish interest rate expectations, a surprise uptick in this week’s inflation numbers could lead to a reassessment, potentially supporting a bump in the Greenback, while creating headwinds for the Aussie dollar. According to the CME FedWatch Tool, the market is pricing in around a 50% chance of a rate hike next month, as such, traders will watch this’s week’s inflation data closely.
1-Hour Chart Shows AUD/USD Holding Near Key Average
The AUD/USD continues to track higher within a rising wedge, with the price rallying from the pattern’s lower to upper trendline following the softer-than-expected U.S. jobs report before consolidating on Monday near the respected 50 SMA.
Support Levels That Continue to Attract Buyers
While the pair’s price fell below the 50 MA following the RBA rate decision, it found immediate buying interest near key support at 0.7050. This area on the chart will likely continue to attract attention given its proximity to the rising wedge pattern’s lower trendline and prominent Aug. 3 swing high.
A close below this level and the rising wedge pattern’s lower trendline could see the pair revisit support around the important 0.7020 region. Traders may see this as a high probability location to open long positions near a horizontal line that connects a minor consolidation period early last week with several notable late July peaks.
Overhead Levels That Could Cap Further Gains
The first overhead area to eye sits around 0.7070. A move back up to this location could be met with selling pressure just below the rising wedge pattern’s upper trendline near the pair’s Friday and Monday peaks.
If the Aussie dollar stages a decisive breakout above the rising wedge, traders can use the measured move technique to project a possible upside target. To apply the analysis, we calculate the distance between wedge’s two trendlines near the start of the formation and add that amount to the potential breakout area. For example, we add 65 pips to 0.7080, which forecasts a bullish target at 0.7145. (0.0065 + 0.7080 = 0.7145).
Cooling Rate Expectations Continue to Support AUD/USD
The AUD/USD’s recent move higher may continue this week, supported by cooling U.S. rate hike expectations following Friday’s soft July jobs report. However, a September rate hike hangs in the balance, meaning readings on U.S. inflation later this week will be watched closely by market participants and could act as a catalyst for driving the pair’s next move.
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