Australian Dollar Forecast: Neutral
- The Australian Dollar fell from recent highs ahead of the RBA meeting
- The US Dollar has firmed post-Fed decision as data is now the focal point
- The RBA will be the centre of attention, but yields may play a role
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The Australian Dollar jumped around last week, peaking above 68 cents before rolling under 67 cents as the U.S. dollar climbed on the back of strong GDP figures for the world’s largest economy.
The US economy grew by 2.4% year on year to the end of the second quarter which was way above the 1.8% expected.
Earlier in the week the Federal Reserve made it clear that the rate path going forward will be determined by the incoming data after they lifted its target rate by 25 basis points.
With a tight labour market and a robust economy, interest rate markets are now looking at potentially tighter US monetary policy.
Conversely, the market has pushed possible rate rises from the Reserve Bank of Australia (RBA) further down the road after a cool inflation read last Wednesday.
The June quarter-on-quarter headline CPI was 0.8% rather than the 1.0% anticipated and 1.4% prior.
The RBA’s preferred measure of trimmed-mean CPI was 5.9% year-on-year to the end of June instead of estimates of 6.0% and 6.6% previously.
The trimmed mean quarter-on-quarter CPI read of 1.0% was below the 1.1% forecast and 1.2% for Q1.
The market is undecided on if the RBA will hike this Tuesday but is leaning toward rates being unchanged.
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This would be running against the tide of tightening that occurred last week at the Fed, the European Central Bank (ECB) and the Bank of Japan (BoJ).
The latter has a policy rate of -0.10% and maintains yield curve control (YCC) by targeting a band of +/- 0.50% around zero for Japanese Government Bonds (JGBs) out to 10 years.
On Friday they tweaked the policy by announcing that they will be less rigid in enforcing a cap of 0.5% at the back end of the yield curve. AUD/JPY raced below 92.00 on the news before recovering to end the week near 94.00.
A key driver for the Aussie Dollar in the week ahead is likely to be the RBA decision but incoming data for the US might play a pivotal role in AUD/USD direction.
With the Fed making it clear that rate changes will be dependent on the incoming economic information, moves in Treasury yields on the back of the data might continue to impact the currency pair.
The yield spread remains in favour of the US Dollar and it might be worth paying attention for Aussie Dollar traders.
AUD/USD AGAINST 2 AND 10-YEAR AUSTRALIA-US YIELD SPREADS
Chart created in TradingView
AUD/JPY TECHNICAL ANALYSIS
Since making a high at 97.67 in June, AUD/JPY has had two notable rallies. A descending trend line from the peak to the top of the first rally was intact after a second attempt to move higher and remains in place for now.
That trend line may offer resistance, currently at 95.60, ahead of the prior peaks and breakpoints of 95.74, 95.85, 96.88 and 97.67.
On Friday, whippy price action saw AUD/JPY test the 50% Fibonacci Retracement level at 91.85 when it made a brief visit to 91.80 but the move was promptly rejected by the market. The 91.80 – 91.85 area could remain a support zone.
Further down support might be at 61.8% Fibonacci Retracement level at 90.50. Closer to the current price, minor support could be found in the 93.00 – 93.20 area where a series of breakpoints lie.
Chart created in TradingView
— Written by Daniel McCarthy, Strategist for DailyFX.com
Please contact Daniel via @DanMcCarthyFX on Twitter