AUD/USD downside risks stay elevated after RBA hike, hotter U.S. CPI

By Grace Kim

AUD/USD has slipped below the 0.6895-0.6945 support zone, with the 0.6834 end-of-March low the initial downside target, FOREX.com Market Analyst Fawad Razaqzada said.

The Australian dollar’s bounce from Monday faded yesterday, and the pair stayed under pressure today, Razaqzada said. He described former support as 0.6890-0.6945 in his overview, then used the narrower 0.6895-0.6945 band in his technical analysis. He still sees near-term risks tilted to the downside.

In Razaqzada’s setup, the Reserve Bank of Australia and U.S. inflation now reinforce each other. The RBA’s pause has removed rate support for the Australian dollar, while October’s hotter CPI has strengthened the case for further Federal Reserve rate hikes.

What pushed AUD/USD lower this week?

Razaqzada said the RBA raised rates last week but “paired its rate hike with a strong signal that a long pause lies ahead.” He said AUD/USD traded bearishly from then onward. The RBA’s willingness to sit on its hands cost the Australian dollar an important source of rate support as other drivers turned against it.

The U.S. dollar staged a sharp recovery yesterday, Razaqzada said, helped by hawkish comments from Fed Governor Christopher Waller. Waller suggested further tightening could be necessary and signaled openness to a larger 50bp move, according to Razaqzada.

Before the CPI release, Razaqzada saw dollar risks as fairly balanced into the end of the week. The inflation data then changed that balance by delivering an upside surprise. Waller’s comments and the CPI result both supported the case for tighter Federal Reserve policy, in Razaqzada’s analysis.

How did October CPI change the Fed rate case?

October headline CPI rose 0.4% month on month, ahead of the 0.3% forecast, Razaqzada reported. Core CPI rose 0.3%, compared with the 0.2% forecast. Both readings exceeded forecasts by 0.1 percentage point.

He said the upside surprise strengthened the case for further Fed rate hikes and could quickly revive rate-driven support for the greenback. In his view, the report strengthened the dollar just as the RBA’s pause weakened the Australian dollar’s rate support.

What do AUD/USD’s technical signals show?

Razaqzada said AUD/USD recently broke below its 200-day moving average and its 21-day exponential. He called the moves objective signs that both the near-term and long-term trends had turned negative.

The pair also slipped below the 0.6895-0.6945 area, an important support and resistance zone in the past. If that area holds as resistance, as it has so far this week, Razaqzada said lower levels could follow.

He summed up the technical bias in one line: “For now, the path of least resistance therefore appears to be to the downside.” The broken support zone will show whether that bias persists in coming sessions, Razaqzada said.

Which levels matter next?

• 0.6895-0.6945: The broken support area and potential resistance band.
• June low: Already tagged, according to Razaqzada.
• 0.6834: The initial target, which is the end-of-March low and has yet to be reached.
• Around 0.6700: The next obvious support area below 0.6834.

Razaqzada said the Australian dollar sits at a very important technical juncture. He also said price action around the broken support zone could prove telling over the coming days and weeks as traders test whether the area holds as resistance.

The next test is whether 0.6895-0.6945 holds as resistance. If it does, Razaqzada said, AUD/USD’s path of least resistance remains lower toward 0.6834.