AUD/USD Eyes 200-Day SMA After Clearing Opening Range for August

Australian Dollar Talking Points

AUD/USD climbs to a fresh monthly high (0.7094) following the slowdown in the US Consumer Price Index (CPI), with the exchange rate on track to test the 200-Day SMA (0.7152) for the first time since June as it clears the opening range for August.

AUD/USD Eyes 200-Day SMA After Clearing Opening Range for August

AUD/USD continues to retrace the decline from the June high (0.7283) as the update to the US CPI curbs bets for another 75bp Federal Reserve rate hike, and it remains to be seen if the Federal Open Market Committee (FOMC) will alter its approach at the next interest rate decision on September 21 as hints of slowing inflation encourages the central bank to winddown its hiking cycle,

Source: CME

Until then, expectations for a looming shift in Fed policy may continue to influence foreign exchange markets as the CME FedWatch Tool now reflects a greater than 50% probability for a 50bp rate hike in September, and a further improvement in risk appetite may keep AUD/USD afloat as Chairman Jerome Powell acknowledges that “it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation.

As a result, AUD/USD may trade to fresh monthly highs over the coming days as it clears the opening range for August, and a further appreciation in the exchange rate may fuel the recent flip in retail sentiment like the behavior seen earlier this year.

The IG Client Sentiment report shows 47.60% of traders are currently net-long AUD/USD, with the ratio of traders short to long standing at 1.10 to 1.

The number of traders net-long is 19.91% lower than yesterday and 24.96% lower from last week, while the number of traders net-short is 4.72% lower than yesterday and 13.98% higher from last week. The drop in net-long interest comes as AUD/USD climbs to a fresh monthly high (0.7094), while the rise in net-short interest has fueled the flip in retail sentiment as 57.38% of traders were net-long the pair last week.

With that said, the change in retail sentiment may coincide with a broader recovery in AUD/USD to largely mirror the behavior from earlier this year, and the exchange rate may test the 200-Day SMA (0.7152) for the first time since June as it clears the opening range for August.

AUD/USD Rate Daily Chart

Source: Trading View

• AUD/USD clears last week’s high (0.7047) after climbing back above the 50-Day SMA (0.6942), with the break/close above the 0.7050 (38.2% retracement) to 0.7070 (61.8% expansion) region bringing the Fibonacci overlap around 0.7130 (61.8% retracement) to 0.7180 (61.8% retracement) on the radar, which lines up with the 200-Day SMA (0.7152).
• Next area of interest comes in around 0.7260 (38.2% expansion), with a break above the June high (0.7283) opening up the 0.7370 (38.2% expansion) to 0.7420 (23.6% retracement) region.
• Will keep a close eye on the Relative Strength Index (RSI) as the recent advance in AUD/USD pushes in indicator towards overbought territory, with a move above 70 in the oscillator likely to be accompanied by a further advance in the exchange rate like the price action seen during the previous year.
• However, failure to test the overlap around 0.7130 (61.8% retracement) to 0.7180 (61.8% retracement) may push AUD/USD back below the 0.7050 (38.2% retracement) to 0.7070 (61.8% expansion) region, with the next area of interest coming in around 0.6940 (78.6% expansion).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong