AUD’s Future Uncertain Ahead of FOMC

Key Points:

• After another bullish week, the AUDUSD may need to cool-off.

• The Fundamental outlook is somewhat bearish moving forward.

• Technical bias is mixed.

The AUD had yet another strong rally last week which left many traders scratching their heads given that there was little to explain the aggressive move.  Nevertheless, the week’s performance isn’t entirely without explanation which might be worth delving into before we take a look at what is next on the agenda. Additionally, it might pay to examine what is going on technically as this is likely to have an impact on the pair moving forward.

Starting with last week, the Aussie Dollar continued to post record gains, smashing through its 2-year high to close the week out at the 0.7912 handle. Whilst many other majors posted strong gains over the past 7 days, what saw the AUDUSD stand out was the fact that almost all of its overall upsides accrued on Tuesday. Whilst some of this is undoubtedly due to the weaker USD, the majority of the sentiment swing reflects the pricing in of rather hawkish meeting minutes from the RBA. Indeed, contrary to the broader market trend, the pair actually spent the remainder of the week moderating away some of this surprise upswing, despite the generally on-target Australian Unemployment rate outcome of 5.6% and the dip in the US Philadelphia Federal Manufacturing index to 19.5.

As for what lies ahead, Wednesday is poised to be a highly volatile session for the Aussie Dollar as important economic news is due out for both sides of the quote. On the AUD side of things, the CPI data is set to be posted and is expected to show a y/y increase to 2.2%. Obviously, if this forecast is achieved it will help the pair to recover some of the losses incurred late last week, maybe even seeing the 0.7950 handle challenged again. However, also due out during the session is the FOMC’s Interest rate decision which could be highly disruptive if the Fed opts to defy expectations and lift rates once again. Nevertheless, we are also expecting a large uptick in the US GDP figure to 2.6% on Friday which could undo any bullishness seen earlier in the week.

On the technical front, it’s a bit of a mixed bag for the AUD which could see the pair enter a near-term ranging phase unless a major fundamental upset is seen.  On the one hand, the EMA bias and the parabolic SAR are rather buoyant and should help to recruit the bulls as the week opens. On the other hand, we can’t escape the fact that the pair is highly overbought and it is well and truly above its 2-year high which could see traders spook ahead of the FOMC meeting. If this is the case, we expect near-term losses to be limited as the 2016 high could act as a support moving forward.  More precisely, support should be strongest around the 0.7890, 0.7836, and 0.7778 levels. In contrast, resistance should be clear at the 0.7956, 0.7984, and 0.8035 levels.

Overall, our outlook is rather mixed going forward and we are likely to be relying on the fundamentals more than the technicals to inform price action in the week to come. As mentioned, the FOMC and the US GDP data are likely to be the key things to watch for and both of these are likely to put pressure on the AUDUSD.