Market update: Australian dollar forecast, and RBA’s move from implicit to explicit – its crunch time

The Australian dollar has been beaten about by US dollar swings in recent history, but that might be about to change if the RBA moves out of step with other central banks.

The tone and messaging from the RBA shifted over the past week and a bit since the bank left rates on hold at 4.10% at the October meeting. The accompanying statement released immediately after the policy decision maintained an option for another hike and notably, the language was much the same as prior missives. This implied potential for tightening had been interpreted by the market as a ‘maybe’ for further hikes. And rightly so, the bank has left rates unchanged for four meetings.

However, the pivot started with Reserve Bank of Australia (RBA) assistant Governor Chris Kent when he made comments on Wednesday 11 October 2023, as noted in this column last week. Among other things, he said, “Some further tightening may be required to ensure that inflation, that is still too high, returns to target.”

Then last Tuesday, the RBA meeting minutes stood out with the language indicating that the bank was much closer to hiking than the statement accompanying the gathering specified. Specifically, the minutes stated, “The Board has a low tolerance for a slower return of inflation to target than currently expected. Whether or not a further increase in interest rates is required would, therefore, depend on the incoming data and how these alter the economic outlook and the evolving assessment of risks.”

Then on Wednesday, RBA Governor Michele Bullock spoke at a summit and pointed to the problems of external events triggering inflation when they arrive one after the other. She said, “The problem is we’ve had shock after shock after shock. The more that keeps inflation elevated, even if it’s from supply shocks, the more people adjust their thinking.” Before adding, “And the more people adjust their inflation expectations, the more entrenched inflation is likely to become. So that’s the challenge.”

The interest rate market is ascribing only around a 45% probability of a hike by the end of the year. If the RBA does not hike at either the November or December meetings, then the next opportunity will not be until February. This brings into view the quarterly CPI number that will be released this coming Wednesday. Ms Bullock will be speaking the following day. It might be the case that the inflation gauge will need to be quite benign to hold back a rate hike.

Nonetheless, the market appears likely to get a clear picture from the RBA Governor on Thursday. Ms Bullock is unencumbered from any commentary that might have impeded her predecessor from being aggressive in stamping out inflation.

The RBA has hiked by 400 basis points (bps) since the pandemic lows near zero, while the Federal Reserve has hiked by 525 bps. There is room for the RBA to catch up. If there is a tightening at the 7 November meeting, the aussie dollar might lift itself off the floor.

AUD/USD technical analysis

AUD/USD remains in a descending trend channel and bearish momentum might be intact for now.A bearish triple moving average (TMA) formation requires the price to be below the short-term Simple Moving Average (SMA), the latter to be below the medium-term SMA and the medium-term SMA to be below the long-term SMA. All SMAs also need to have a negative gradient.

When looking at any combination of the 10-, 21-, 55- 100- and 200-day SMAs, the criteria for a bearish TMA have been met and might suggest that bearish momentum is evolving.

Last Wednesday’s high of 0.6447 coincides with the 55-day Simple Moving Average (SMA) and that level may offer resistance ahead of a cluster of prior peaks in the 0.6500 – 0.6510 area. Further up, the 0.6600 - 0.6620 area might be another resistance zone with several breakpoints and previous highs there.

On the downside, support may lie near the previous lows of 0.6285, 0.6270 and 0.6170. The latter might also be supported at 161.8% Fibonacci Extension level at 0.6186.

AUD/USD daily chart

EUR/AUD technical analysis

EUR/AUD appears to be in range trading mode, having been contained between 1.6200 and 1.7100 for four months. The clustering of the 10-, 21-, 34-, 55- and 100-day Simple Moving Averages (SMA) between 1.6520 and 1.6695 might support the range trading thesis.

Last Friday the price stalled at a recent high just below 1.6800 and it may continue to offer resistance. Other prior peaks near 1.6900 and 1.7065 might offer resistance. On the downside, support could be at the previous lows at 1.6445 and 1.6320 ahead of a potential support zone in the 1.6235 and 1.6265.

EUR/AUD daily chart

_{This information has been prepared by DailyFX, the partner site of IG offering leading forex news and analysis. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.}