audusd hovering below 0 754555 descending channel resistance ahead of rba 1850722017

Since our last analysis dated on 27 April 2017, the AUD/USD had declined and hit the first downside target/support of 0.7440 (printed a low of 0.7435 on 27 April 2017, U.S. session). Thereafter, it staged a rebound which surpassed our expectation as it broke above the 0.7500/7522 key short-term resistance as per highlighted in our last report, reinforced by weaker than expected U.S. economic that was released yesterday; ISM manufacturing for Apr (54.8 versus 56.5 consensus), personal spending for Mar (0% m/m versus 0.2% m/m consensus) and personal income for Mar (0.2% m/m versus 0.3% m/m consensus). Click here for a recap on our previous report.

Later today at 0430 GMT, we will have the monetary policy meeting outcome from the Reserve Bank of Australia (RBA) where consensus is expected to be status quo where its benchmark policy interest remains unchanged at 1.5% with the interest rate futures market that is pricing in a 98% probability of 1.5% as well.

The focus will be on the tonality of the monetary policy statement which highlights the following key areas:

• Inflation and wage growth – In the last April meeting, RBA started that low wage growth continued to put downward pressure on the inflation outlook. The latest inflation data for headline inflation rose to 2.1% y/y in Q1 2017 from 1.5% y/y in Q4 2016 that was within RBA’s targeted range of 2% to 3% while core inflation came in at 1.9% y/y in Q1 2017.
• Labour market conditions – RBA had acknowledged in its April meeting that the labour market had softened with the unemployment rate that had inched slightly higher. The latest employment data for March came in better than expected where it increased by 60,900 in seasonally adjusted terms versus a consensus reading of an increase of 20,000. The unemployment rate was held steady at 5.9% with a slight increase seen in the labour participant rate form 64.6% to 64.8%.
• State of the housing market – RBA had continued to caution speculation in the housing market especially in top-tier cites in Sydney and Melbourne that made it reluctant to lower interest rates in exchange for higher economic growth. Latest data from CoreLogic had indicated that housing prices in Sydney and Melbourne had recorded the slowest m/m growth since December 2015 where prices just rose 0.04% and 0.5% respectively.

Thus based on the latest robust labour market data, there is a likely chance that RBA may change its previous cautionary tone on the state of the economy towards a slightly more optimistic view which can trigger a further potential upside in the AUD/USD  However, there are several “wildcards” that can keep the hawks of RBA at bay:

• Lacklusture growth in retail spending where Feburary’s  retail sales continued to inch lower to record a 2.9% y/y increase, the lowest in the past one year.
• Plunging iron ore prices that that recored a horrendous decline of close to 30% from its peak in February 2017 before it recovered slightlty last week.  RBA may higlight its impact on the mining sector and its trickle effect of the broader economy.

Now, let’s us take a look at the latest technical elements on AUD/USD

Short-term technical outlook on AUD/USD

(Click to enlarge chart)

Key technical elements

• The recent rebound from the 27 April 2017 low of 0.7434 has led to AUD/USD to hover around its upper boundary of its medium-term descending channel in place since 21 March 2017 high at 0.7545/55.
• The aforementioned descending channel resistance of 0.7545/55 also confluences a Fibonacci cluster.
• The key significant resistance will be at 0.7585/90 which is defined by the 24 April 2017 swing high (post 1^st round French president election) and the 50% Fibonacci retracement of the on-going multi-week decline from 21 March 2017 high to 27 April 2017 low.
• The hourly RSI oscillator has started to flash a bearish divergence signal at its overbought region which suggests that the upside momentum of the recent rebound has started to abate.

Key levels (1 to 3 days)

Intermediate resistance: 0.7545/55

Pivot (key resistance): 0.7585/55

Supports: 0.7490 (downside trigger), 0.7440/30 & 0.7400/7390

Next resistance: 0.7675 & 0.7585/7610 (long-term resistance)

Conclusion

As long as the 0.7585/90 pivotal resistance is not surpassed, the AUD/USD may see a potential bearish reversal and a break below 0.7490 is likely to reinforce a further decline to retest 0.7440/30 before targeting 0.7400/7390 next.

However, a clearance above 0.7590 is likely to invalidate the preferred bearish reversal view to see the continuation of the push up towards the next resistance at 0.7675.

Charts are from eSignal

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