AUD/USD Forecast: Not out of the woods yet, 0.7000 mark holds the key for bulls

The AUD/USD pair regained positive traction on the first day of a new week, though the intraday uptick faltered just ahead of the 0.7000 psychological mark. The downside, however, remains cushioned, at least for the time being, amid modest US dollar weakness. Investors took comfort from the fact that the Fed forecasted the rate to decline to 3.4% in 2024 and 2.5% over the long run from the anticipated 3.8% in 2023. This was seen as a key factor behind the recent sharp decline in the US Treasury bond yields, which kept the USD bulls on the defensive. Adding to this, a generally positive tone around the equity markets further undermined the safe-haven buck and extended support to the risk-sensitive aussie.

This, along with the Reserve Bank of Australia's hawkish outlook, assisted the AUD/USD pair to attract fresh buying during the Asian session on Tuesday. The RBA meeting minutes released earlier today showed that policymakers had leaned towards more tightening amid a resilient economy, which was most evident from record-low employment rates. This followed comments by RBA Governor Philip Lowe, saying that the Australians should be prepared for more interest rate increases. Lowe emphasized that future policy moves will be shaped by incoming economic data and that we are not on a pre-set path. This provided an additional lift to the Australian dollar and contributed to the bid tone surrounding the AUD/USD pair.

It, however, remains to be seen if bulls are able to capitalize on the move amid expectations that the Fed would stick to its aggressive policy tightening path. The markets seem convinced that the US central bank would raise interest rates at a faster pace to curb soaring inflation and expect another 75 bps rate hike at the next meeting. This might continue to act as a tailwind for the USD and hold back traders from placing aggressive bullish bets around the AUD/USD pair. Market participants now look forward to the US economic docket, featuring the release of Existing Home Sales. This, along with the US bond yields and the broader market risk sentiment, might influence the USD price dynamics and produce some trading opportunities around the major.

Technical outlook

From a technical perspective, bulls now need to wait for sustained strength beyond the 0.7000 mark before positioning for any further gains. The AUD/USD pair would then climb back to the 0.7045-0.7050 supply zone. Sustained strength beyond would suggest that spot prices have formed a near-term bottom and allow bulls to aim back to reclaim the 0.7100 round-figure mark. The momentum could further get extended beyond the 0.7120-0.7125 region, towards the 0.7150 horizontal support breakpoint, now turned resistance.

On the flip side, the 0.6910-0.6900 region might continue to protect the immediate downside. Some follow-through selling would make the AUD/USD pair vulnerable and expose the YTD low, around the 0.6830-0.6825 region touched in May. A convincing break through the latter, leading to a subsequent fall below the 0.6800 mark, should pave the way for an extension of the recent downward trajectory witnessed since the beginning of this month.