Despite the pullback in the AUDUSD pair, market participants maintain a positive outlook. The pair has faced a sell-off due to rumors of a cut in the RBA’s key rate. After all, there will be an opportune time to buy the aussie. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
The RBA is ready to cut the cash rate by 25 basis points to 3.6%.Australia has received a minimum tariff of 10% from the US.Pressure from the US administration on the Fed is leading to a loss of confidence in the greenback.A return of the AUDUSD pair above 0.6515 will generate a buy signal.
Weekly Fundamental Forecast for Australian Dollar
The Reserve Bank of Australia (RBA) finds itself in a favorable position, having an opportunity to maintain its currency’s value while reducing interest rates. At the same time, the US will unlikely be dissatisfied with the aussie’s devaluation. Most Bloomberg experts anticipate the first consecutive cash rate cut in six years at the July 8 meeting. The cost of borrowing will decrease by 25 basis points to 3.6%. The question remains: what are the implications of this change?
In May, when the RBA discussed cutting its key rate by 50 basis points, the broader economic outlook was becoming increasingly uncertain. The US-China trade war was in full swing, and serious problems in the US debt market were heightening the risks of recession. By early July, the situation had stabilized, and the S&P 500 reached record highs. The RBA has chosen to adopt a more accommodating stance, following a similar approach adopted by other central banks, such as the ECB. They are proactively reducing interest rates.
Central Banks’ Interest Rates Trajectory
Source: Bloomberg.
As the saying goes, haste makes waste. The Reserve Bank of Australia should thank itself as it did not rush to raise rates in 2022–2023, recognizing the temporary nature of high inflation and allowing the economy to grow. Michele Bullock can take her time easing monetary policy. Inflation is under control, the Australian economy is slowing down, but the labor market remains strong.
Australia’s Core CPI
Source: Bloomberg.
The derivatives market predicts two more acts of monetary expansion before the end of the year, in addition to the cut in July. As a result, the cash rate will be reduced to 3.1%. However, there is a possibility that it will be reduced to 3.35% in the near future, followed by a long pause.
However, the situation may change in a way that is unfavorable to the RBA. Indeed, Australia, which has a trade deficit with the US, agreed to get a minimum 10% tariff. However, the intensification of the ongoing conflict between Washington and Beijing poses a threat not only to Canberra’s primary trade partner but also to a decline in commodity prices.
However, the challenges faced by the United States are particularly acute. The $3.3 trillion fiscal stimulus package will increase the volume of Treasury issuance. In this regard, Treasury bond yields will surge, as buyers will demand higher returns. The shift toward short-term debt is a risky strategy. In this scenario, the yields on such securities rise, and the market stops expecting a cut in the federal funds rate. The only remaining option is to exert pressure on the Fed chair. However, this approach could potentially lead to a weaker US dollar.
Weekly AUDUSD Trading Plan
The AUDUSD pair declined ahead of the expected RBA cash rate cut due to rumors. The market will likely buy the aussie on facts, so it makes sense to buy the dip. A rebound from the support levels of 0.648 and 0.644, or a return above 0.6515, will allow traders to open long trades on the Australian dollar against the US dollar.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of AUDUSD in real time mode
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