AUD/USD weekly outlook: Patiently awaiting a breakout

Key themes and events for AUD this week:

• Jerome Powell speech
• US inflation
• AU wages
• AU employment

Thursday’s US inflation data will once again take centre stage next week, although it is also worth keeping an ear out for Jerome Powell’s comments when the speaks late on Wednesday. Powell is speaking alongside ECB hawk Knot during a ‘moderated’ discussion, and with traders feverishly seeking clues for cuts from the Fed and ECB then we can expect markets to react accordingly if any such clue is dropped. We know that US PCE inflation was hotter than liked, headline core CPI remains elevated at 3.8% y/y and CPI is now pointing higher. Therefore, unless we see some softer figures from the US inflation report then we might expect a headwind for AUD/USD next week. Ultimately, weaker US economic data is required to justify Fed cuts that traders crave, and that could weigh on yields and the US dollar to help support AUD/USD.

As for domestic data, Australia’s quarterly wages and monthly employment reports are released, but I doubt they’ll make a material impact on any upcoming RBA decisions. Whilst the RBA reintroduced a tightening bias in their statement, Governor Bullock did say during her press conference that she things rate are at the right level. And that basically means we can likely expect 4.35% to remain the current rate into next year. To stand any chance of a cut this year likely requires two or more cuts from the Fed alongside a welcomed drop of domestic inflation, and unfortunately neither of those scenarios seem likely at present. Of course, should wages rise and employment knock out decent figures, it may stir some speculation of another hike to support AUD pairs, even if a hike also seems unlikely.

AUD/USD futures – market positioning from the COT report:

Futures traders continued to trim short exposure to AUD/USD futures last week, sending net-short exposure among asset managers and large speculators to their least bearish levels since January and February respectively. Long exposure among both sets of traders are also trending higher, so perhaps these are the earlier stages of a rise for AUD/USD. The ideal scenario for AUD/USD bulls from here is to see US data continue to soften to justify Fed cuts, yet not deteriorate too quickly as to fan fears of a global recession. Under this ‘soft landing’ scenario, equity markets and therefore sentiment in general could flourish and take AUD/USD along with it.

However, the weekly doji shows a clear hesitancy to break higher for now, so perhaps we’re in for another range-bound week below resistance levels unless US dollar strength returns to helped AUD/USD retrace a tad.

AUD/USD technical analysis

The rally from 64c appears to be impulsive, and with traders closing shorts in exchange for longs an eventual bullish breakout above the Q3 open (0.6660) I the core bias.

However, we may need to be patient for any such breakout unless we see another clear round of US dollar weakness.  Furthermore, the AU-US 2-year spread is not backing up the recent swing higher for AUD/USD seen on Thursday, even though spot prices are holding above the 10/20day EMAs.

Therefore, trading conditions to be choppy within the top third of the 0.6400 – 0.6650 range before the anticipated lift off. And such conditions usually favour traders with shorter hold times (between a few hours to 2-3 days).

A swing low has formed at 0.6658 and prices retraced around half of Thursday’s bullish range-expansion day. Bulls may want to seek dips towards Thursday’s lows for a cheeky long towards 0.6650. Yet I’d prefer to err on the side of caution and book quick profits the closer AUD/USD rises towards the Q3 open, as this is an area we’re yet to see a daily close above this year. 

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge