The Reserve Bank of Australia held its key cash rate at 2.75% for the second straight month, meeting broad expectations of the market. AUD/USD popped higher a little following the rate decision, but tanked lower quickly after the accompanying RBA statement showed that the Central Banks is continuing to maintain a dovish guidance for the currency. RBA said that current inflation outlook will provide scope for further easing, even though June inflation forecast is standing at 3.0%, on the high end of its 2-3% inflation target. This is strange considering that any rate cut would actually send inflation higher, and above the 3.0% comfort ceiling. Perhaps the underlying assumption by RBA is that previous month’s growth could be an exception rather than the rule of thumb, with Governor Stevens saying that inflation rate would remain “consistent with target over the next 1-2 years”. On top of this scathing outlook on future inflation and by association economic outlook, RBA maintained that current AUD exchange rate remains on the high side, suggesting that exchange rate may fall further. These negative comments pulled AUD/USD more than 50 pips lower ( and 70 pips lower peak to trough) after the announcement, breaking away from the rising Channel that has been in play since Monday’s recovery.
From a technical perspective, the break of the Channel is significant as it symbolizes the invalidation of Monday’s recovery efforts, putting bearish bias back in focus. Technically, the break happened 1 hour before the announcement with a bearish candle body entirely below the Channel bottom, in conjunction with Stochastic readings pushing below the 80.0 mark which indicates the birthing of a new bear cycle. Technical traders who took the sell signal earlier would have been well in the money now (but this would have been an extremely risky proposition with RBA rate announcement looming).
Currently, price is sitting around 0.917 support, and a break would open up the descending trendline as a viable bearish target. However, a break to the underside of the descending trendline would be more difficult, with Stoch readings closing in on the Oversold region, and likely to enter deep into the Oversold territory when price trades closer to 0.910. Nonetheless, price may still be able to straddle the trendline and edge lower slowly, and traders should watch out for any signs of bearish acceleration or rebound around the 2013 lows for clearer sign of rebound/bearish extension.
Weekly chart shows price finding some resistance from the descending Channel bottom. Even though price has been deeply Oversold, both Stoch and Signal lines are continuing to point lower, suggesting that we could still be seeing further selling movement despite bears looking heavily overextended.
Fundamentally, it is worth noting that AUD/USD rallied yesterday mostly due to the decrease in USD strength. Should USD strength returns, AUD/USD would be given yet another bearish push that could result in a strong acceleration lower since sentiment surrounding the currency is so negative right now.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.