AUD/USD is currently moving sideways, hovering in a 0.6200-0.6300 range. After dropping over the past several days, traders took a brief respite – earlier, AUD/USD lost more than 300 points as USD bulls took control of the market. This begs the question – will the pair's downward movement stop at 0.6200, or will it break through this level and sink even lower?
From a technical viewpoint, there are no obstacles that could prevent the pair from falling to 0.6200 at the very least. At H4 and higher timeframses, AUD/USD is at the lower band of the Bollinger Bands indicator or between its middle and lower bands, suggesting that it is more likely to go south than north. At D1 and W2 timeframes, the Ichimoku indicator has formed a Parade of Lines bearish signal, which also clearly indicates the pair's momentum. The closest key support for the pair is located at the lower band of the Bollinger Bands indicator on the D1 timeframe, 0.6200.
Fundamental factors also do not favor the Australian currency. The ever rising gap between Fed and RBA interest rates continue to put pressure on the Australian dollar. At its latest policy meeting, the Reserve Bank of Australia decided to slow down the pace of monetary tightening by hiking the rate by 25 basis points instead of the expected 50 bps increase. The Australian central bank clearly stated it was concerned by the impact accelerated tightening could have on the Australian economy. The results of the policy meeting suggest that the RBA would increase the rate by 25 bps at the remaining two meetings. In the meantime, markets are pricing in an 80% probability of a 75 bps interest rate hike by the Federal Reserve in November. The chances of such a move would exceed 90% if the latest US inflation data exceeds expectations. It would also make a 75 bps hike in December more likely. All Fed policymakers that made public statements this week, such as Lael Brainard, Michelle Bowman, and Loretta Mester, were hawkish in their tone.
Yesterday's FOMC meeting minutes for September should also be taken into account, even though traders have largely ignored it in favor of the US CPI data. The minutes are unambiguously hawkish, as the document's statements indicate. "Participants judged that the Committee needed to move to, and then maintain, a more restrictive policy stance in order to meet the Committee's legislative mandate to promote maximum employment and price stability," the minutes said. "Many participants noted that, with inflation well above the Committee's 2 percent objective and showing little sign so far of abating, and with supply and demand imbalances in the economy continuing, they had raised their assessment of the path of the federal funds rate that would likely be needed to achieve the Committee's goals." According to the dot plot released in September, the median Fed fund target rate by the end of 2023 increased to 4.6%. For 2024, the median target rate is 3.9%.
"Several participants noted that, particularly in the current highly uncertain global economic and financial environment, it would be important to calibrate the pace of further policy tightening with the aim of mitigating the risk of significant adverse effects on the economic outlook," the meeting minutes said.
Some experts found the statement above to be a cause for alarm and claimed it was a signal that the Federal Reserve could, in fact, slow down the pace of its monetary tightening cycle.
However, the wording of the Fed meeting minutes is scrupulously formulated, and there is a difference in meaning between "several participants" and "many participants". There is no time lag between these statements as well. It is unclear when the US regulator could slow down its monetary tightening - it could possibly happen after inflation in the US slows down. In addition, Michelle Bowman said yesterday that the Fed would continue to increase interest rates until price growth begins to cool down.
This means that the gap between Fed and RBA monetary policies would continue to put pressure on AUD/USD. Growing risk-off sentiments would also give support to the US dollar. Asides from rising geopolitical tensions, the COVID-19 pandemic remains an issue - Shanghai, China's financial capital, has again imposed quarantine measures due to a rising number of coronavirus cases. Half of the 25-million city would be put into lockdown as testing is carried out. More restrictions by Chinese authorities could follow afterwards.
Opening short positions in AUD/USD remains the best course of action in this situation. The closest target is 0.6200.