Australian dollar created too much optimism

06 April 2022 547
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The AUDUSD pair is following the uptrend for the third month. Yesterday a maximum since the summer of last year had been set, then AUDUSD abruptly rolled back down. Will it be the reason for the whole trend’s changing?

The growth of the Australian currency relies on quite strong macroeconomic statistics: indications of GDP, retail sales, and business confidence show the acceleration of growth. But the most important thing is the visible trade balance surplus caused by the growth of prices for the majority of Australian export goods (especially gold and other commodities).  

Currently, the level of inflation in the Australian economy doesn’t raise a concern. A 3,5% price growth doesn’t look frightening, especially if we compare it with similar statistics from the USA, European Union or Great Britain. Nevertheless, the Reserve Bank of Australia progressively comes to an understanding that it is better to stop a expansionary monetary policy.

At the meeting on April 5, the Australian regulator finally got rid of the formulation "be patient" about tightening their policy. In general, there is a need to raise the rate, especially considering the tightening financial conditions by almost all world regulators (except the ECB, Swiss National Bank and the Bank of Japan).

For the last few weeks, the American currency was a bit “in the shadow”: the rising stock market has created the demand for risky assets and profit-taking in USD. However, as the Fed meeting on May 4 approaches, the optimism of market participants slowly disappears. The officers of the USA financial regulator toughen their rhetoric more and more to support the dollar.

Indeed, the representatives of FRS admit that they had underestimated the inflation and let it go out of control. In such a situation, they should toughen their politics rapidly including hiking the key rate to 0,5% and shortening the balance of Fed after the May meeting as soon as possible.

Technically a “shooting star” on the AUDUSD chart signals the reversal. The RSI indicator is still in the oversold zone but the downward reversal has already happened. Right now, the growing trend doesn’t look justified, but the correction to the level of 0.75 is quite possible.

The following trading strategy options can be suggested:

Sell AUDUSD at the current price. Take profit – 0,75. Stop-loss – 0,76.

Also, traders can use Trailing stop instead of fixed Stop loss at their disposal, when the price moves downwards.

This content is for informational purposes only and is not intended to be investing advice.

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