Australia Dollar Outlook: AUD/USD Gains Momentum Ahead of RBA Decision

The Australian Dollar (AUD) is showing signs of resilience against the US Dollar (USD) as the exchange rate, AUD/USD, makes a bounce back from a weekly low of 0.6235. Traders are watching closely to see if the currency can attempt to reach the January high of 0.6331, particularly as it recently closed above the 50-Day Simple Moving Average (SMA) of 0.6274 for the first time since October.

Market Dynamics Influencing AUD/USD

In recent trading, AUD/USD appeared unaffected by the unexpected rise in the US Consumer Price Index (CPI), which increased from 2.8% in December to 3.0% in January. The core rate also widened slightly to 3.3% from 3.2%. This CPI report raised questions about the Federal Reserve’s next moves regarding interest rates, although insights from Fed Chairman Jerome Powell suggest that the central bank is not in a rush to adjust its policy. During his semi-annual testimony to US lawmakers, Powell expressed a willingness to adopt a more neutral policy stance, indicating that economic data would be carefully assessed before any changes are initiated.

Conversely, the Reserve Bank of Australia (RBA) is also at a pivotal point. The central bank maintained the cash rate at 4.35% throughout 2024 and appears to be adopting a cautious ‘wait-and-see’ approach. RBA Governor Michele Bullock has noted that ‘underlying inflation is still high,’ hinting at potential future adjustments to their monetary policy, although the expectations are that they may remain steady at their first meeting in 2025.

Future Implications for AUD/USD

Given the background of steady rates from the RBA, AUD/USD may find support and sustenance. However, traders remain vigilant about any shifts in the RBA’s forward guidance which could indicate a future pivot towards lower interest rates. A dovish outlook from the RBA could pose challenges for the Australian Dollar, potentially reversing the recent upward trend in AUD/USD that saw a recovery from the monthly low of 0.6088.

Analysts suggest that the exchange rate might struggle to maintain its rebound if dovish sentiments prevail. If AUD/USD successfully defies the negative momentum indicated by the 50-Day SMA, there may be opportunities for a more pronounced recovery, marking a significant departure from its downward trajectory.

Technical Outlook

From a technical perspective, AUD/USD presents interesting signals. The exchange rate is currently defending a critical support zone between 0.6240 (61.8% Fibonacci extension) and 0.6270 (2023 low). A sustained close above 0.6318 (November 2023 low) could bring the target of 0.6410 (50% Fibonacci extension) into play, with the December high of 0.6515 also on the horizon.

Conversely, should there be a break or a close below the 0.6240 to 0.6270 zone, AUD/USD could retrace towards 0.6130 (23.6% Fibonacci retracement) to 0.6170 (2022 low), and further declines could place the monthly low of 0.6088 into focus. Additionally, breaking below 0.5980 (April 2020 low) to 0.6020 (38.2% Fibonacci extension) may set the stage for further bearish movement towards the 0.5930 (50% Fibonacci extension) level.

Conclusion

As market participants eagerly await the upcoming announcements from the RBA, the performance of AUD/USD will be pivotal in setting the tone for its trajectory in the near term. The balance of monetary policy stances between the US Federal Reserve and the RBA will likely be influential factors in determining the currency’s movement in the weeks to come. Investors and traders alike are urged to stay informed and prepared for potential shifts in both economic data and central bank policies.

Written by: David Song, Senior Strategist

Follow on X at @DavidJSong