The AUDUSD pair has successfully met the downside target of 0.63 as of early November. However, the U.S. currency shifted to weakening, and the Australian dollar strengthened by more than 6.5% in 2 weeks. AUDUSD has now reached a major level of 0.67, after hitting the low of July. Will the quotes be able to break higher, or will we see a corrective decline first?
The key driver for the weaker U.S. dollar remains the same — following October inflation data, the outlook for the Fed's December 14 meeting seems to be in favor of lower rate hikes from 0.75% to 0.5%. Thus, a peak in the current monetary tightening cycle is also expected to decrease from the 5-5.25% range to 4.75-5%. The term has been shifted from June to May.
The improved rate outlook proved to be refreshing for nearly all risky assets. Сomments made by some analysts and Fed officials, suggesting lower core inflation within one month doesn't mean a trend reversal, have gone unheeded for now. But these warnings might be recalled.
A major sentiment indicator could be the US retail sales statistics for October, coming out on Wednesday. Ironically, it would be better for financial markets to see worse than expected results (+1%), as the Fed might then have fewer grounds to continue its monetary tightening.
Australia's tightening cycle is nearing its end. The minutes of the Reserve Bank's (RBA) latest meeting, published today, reveal another minor key rate hike of 0.25% to 3.1% on December 6. In fact, the RBA's policies don't really have much to do with it. All the AUDUSD dynamics is determined by the U.S. dollar, as well as in other currency pairs with its presence. Just look at the USDJPY pair showing the strongest daily fall for more than 20 years, despite no policy changes being made by the Bank of Japan (BOJ).
The Stochastic indicator has entered the overbought zone for the first time since August, signaling the AUDUSD correction is imminent.
The following trading strategy can be suggested:
Sell AUDUSD in a range of 0.67-0.672. Take profit 1 - 0.663. Take profit 2 - 0.655. Stop loss - 0.676.
Traders, at their discretion, may use a Trailing stop instead of a fixed Stop loss.