AUD/USD Outlook Mired by Failure to Defend Opening Range for May

Australian Dollar Talking Points

AUD/USD clears the January low (0.6968) as it extends the series of lower highs and lows from last week, and the exchange rate may face a further decline over the coming days as it snaps the opening range for May.

AUD/USD Outlook Mired by Failure to Defend Opening Range for May

AUD/USD largely tracks the weakness in commodity bloc currencies as it trades to a fresh yearly low (0.6945), and swings in investor confidence may influence the exchange rate as the US stock market pushes to fresh yearly lows.

As a result, the recent series of lower highs and lows may push AUD/USD towards the July 2020 low (0.6877) amid the deterioration in risk appetite, and it remains to be seen if fresh data prints coming out of the US economy will influence the exchange rate as the Consumer Price Index (CPI) is anticipated to downtick for the first time since August.

The CPI is expected to narrow to 8.1% from 8.5% per annum in March, with the core rate of inflation projected to show a similar dynamic, but the figure may do little to influence the monetary policy outlook with the Federal Reserve on track to normalize monetary policy further over the coming months.

In turn, the preset course for monetary policy may continue to drag on AUD/USD as the Federal Open Market Committee (FOMC) plans to winddown the balance sheet starting in June, and a further decline in the exchange rate may fuel the tilt in retail sentiment like the behavior seen during the previous year.

The IG Client Sentiment report shows 75.68% of traders are currently net-long AUD/USD, with the ratio of traders long to short standing at 3.11 to 1.

The number of traders net-long is 11.15% higher than yesterday and 3.65% higher from last week, while the number of traders net-short is 5.01% lower than yesterday and 7.06% lower from last week. The rise in net-long interest has fueled the crowding behavior as 73.08% of traders were net-long AUD/USD last week, while the decline in net-short position comes as AUD/USD trades to a fresh yearly low (0.6945).

With that said, AUD/USD may face a further decline over the coming days as it clears the January low (0.6968), and the exchange rate may attempt to test the July 2020 low (0.6877) as it snaps the opening range for May.

AUD/USD Rate Daily Chart

Source: Trading View

• AUD/USD clears the January low (0.6968) as it extends the series of lower highs and lows from last week, with a break/close below the 0.6940 (78.6% expansion) area raising the scope for a test of the July 2020 low (0.6877) as it snaps the opening range for May.
• Next area of interest comes in around 0.6770 (38.2% expansion) to 0.6820 (50% retracement), with a break of the June 2020 low (0.6648) bringing the 0.6510 (38.2% retracement) to 0.6520 (38.2% expansion) area on the radar.
• However, lack of momentum to break/close below the 0.6940 (78.6% expansion) area may generate a rebound in AUD/USD as the recent decline in the exchange rate fails to push the Relative Strength Index (RSI) into oversold territory, with a move above the 0.7070 (61.8% expansion) to 0.7090 (78.6% retracement) region bringing the Fibonacci overlap around 0.7130 (61.8% retracement) to 0.7180 (61.8% retracement) back on the radar.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong