Australian GDP Preview: Modest economic contraction won’t affect Aussie strength

Against what’s happening in other major economies, the Australian economy seems to be bearing quite well within the coronavirus pandemic. Despite heading into winter, the country has been reporting an average of 20 new cases per day since mid-April.

Australian Prime Minister Scott Morrison has announced a three-step plan to reopen the country's economy by July. Retail businesses reopened on May 4 while schools restarted on May 8. Small gathers are allowed, and using face masks is not mandatory.

RBA maintains its accommodative approach

On Tuesday, the RBA had a monetary policy meeting, leaving rates at 0.25%, as expected. Policymakers reaffirmed that the "accommodative approach will be maintained as long as it is required." According to the central bank’s previous statement, the local economy is expected to contract by around 10% over the first half of the year, while the unemployment rate is foreseen rising to around 10% in the quarter to June.

In this scenario, the country will release its Q1 Gross Domestic Product. The economy is expected to have shrunk by 0.3% in the three months to March, while the economy is expected to have grown by 1.4% when compared to the first quarter of 2019.

AUD/USD Technical outlook

The Aussie is among the strongest currencies these days, trading against the greenback at levels last seen in January this year well above the 0.6800 level. On Monday the pair broke above its 200 DMA, while the rally extended on Tuesday. Daily basis, the pair is set to keep on rallying, as technical indicators have also accelerated north, now entering overbought territory.

In the shorter-term, and according to the 4-hour chart, the pair is extremely overbought, yet there are no signs of an imminent bearish correction, as technical indicators consolidate near their recent highs. Meanwhile, the pair is firmly above its moving averages, with the 20 SMA currently at around 0.6720.

A Q1 GDP reading in-line with the market’s expectations, or even slightly worse, should keep the pair on its bullish track toward the psychological 0.7000 threshold. A pullback would find an immediate support level at 0.6810, followed by the 0.6750 price zone. Below this last, the pair has room for a steeper bearish correction, although it seems quite unlikely at the time being.