AUD/USD offered at H&S neckline hurdle on RBA's downward revision of inflation forecasts

  • AUD/USD offered at head and shoulders neckline level of 0.7685.
  • RBA lowers inflation forecasts.
  • RBA jawbones AUD.

AUD/USD ran into offers around 0.7685 (head and shoulders neckline) levels and fell to a session low of 0.7665 after the Reserve Bank of Australia (RBA) Statement on Monetary Policy (SOMP) revised inflation forecasts lower and talked about the disinflationary impact of a strong AUD.

Key points

  • RBA lowers inflation forecasts, underlying inflation not expected to reach 2 pct until early 2019.
  • Forecasts underlying inflation at 1.75 pct to December 2018, then 2 pct to December 2019.
  • CPI inflation is seen at 2 percent to Jun. 2018 and 2.25 percent Dec. 2019.
  • Estimates CPI re-weighting means underlying inflation overstated by 0.3 ppt.
  • Says a further rise in the AUD would slow pick up in economic growth and inflation.
  • Forecasts GDP growth 2.5 pct December 2017, 3.25 pct December 2018, 3.25 pct December 2019.
  • Forecasts unemployment rate at 5.5 pct out to June 2019, 5.25 pct by December 2019.
  • revises up the outlook for jobs growth, leading indicators point to solid growth over next 6 months.

As of writing, the AUD/USD is trading largely unchanged on the day at 0.7677 levels. RBA's upbeat view on the labor market and leading indicators seem to have saved the day for the Aussie bulls.

AUD/USD Technical Outlook

Jim Langlands from FX Charts details the technical view as follows-

"While the short term momentum indicators are neutral, the dailies appear to be turning a little more positive, suggesting that we could be in for a possible squeeze towards 0.7700, above which could see a run towards 0.7730/40.

The weekly charts still look heavy though so selling into strength remains the overall plan. Near term support arrives at 0.7650 and again at the strong level of 0.7625. An eventual break of 0.7625 would bring fresh selling which could then see a run towards 0.7600 and eventually to 0.7570. Overall, with the longer term charts looking heavy, I suspect the Aud$ is building a bear flag (see daily chart) and is biding its time ahead of a more sustained test of 0.7625/30, which could then take us to 0.7570 and eventually towards 0.7400, but patience will be required and we look likely to see better levels to sell it than we are currently trading at."

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