Technical Analysis

AUD/USD Price Analysis – May 7, 2024

By LonghornFX Technical Analysis
May 7, 20244 min

Daily Price Outlook

During the European trading sesion, the AUD/USD currency pair failed to maintain its upward rally and turned bearish around the 0.6602 level, hitting the intraday low of 0.6586.

However, the reason for its downward trend could be attributed to multiple factors, including the renewed strength of the US dollar, which gained traction due to the risk-off market sentiment, boosting safe-haven assets like the US dollar.

Meanwhile, the risk-off market sentiment, triggered by ongoing tensions in the Middle East, was seen as another key factor that undermined the riskier Australian dollar and contributed to the AUD/USD pair's losses.

In addition to this, the RBA's decision to keep rates unchanged, despite market expectations of a hawkish stance due to high inflation, weakened the Australian dollar and contributed to the AUD/USD pair's losses.

Australia's Monetary Policy and Economic Data Impact on AUD/USD

On the Australian front, the Reserve Bank of Australia (RBA) kept its interest rate steady at 4.35%, surprising many who expected a more hawkish stance after inflation data came in higher than anticipated. This was the fifth consecutive quarter of declining inflation, but the rise in the Consumer Price Index (CPI) in March surprised many people.

RBA Governor Michele Bullock highlighted the need to monitor inflation risks and outlined the bank's plan to bring inflation back to its 2-3% target by 2025. The Judo Bank Australia Composite PMI for April showed slower growth in the private sector, with manufacturing output falling while services grew.

Analysts at Commonwealth Bank and Westpac predict the RBA's rate to peak at 4.35% in November 2023 and then drop to 3.10% by December 2025.

On the data front, Australia's inflation rate (YoY), as measured by TD Securities and the University of Melbourne, decreased slightly to 3.7% in April from 3.8% the previous month, while the monthly inflation rate remained steady at 0.1%. In China, the Caixin Services Purchasing Managers' Index (PMI) for April dropped a bit to 52.5 from 52.7 in March.

Despite the slight dip, it still marks the 16th consecutive month of growth in China's services sector, which is significant for Australia's economy. As one of China's major exporters, Australia's market might benefit from continued expansion in Chinese services activity.

Therefore, the RBA's decision to keep interest rates steady, coupled with slower growth in Australia's private sector, has weakened the Australian dollar, putting downward pressure on the AUD/USD pair. However, strong Chinese service activity might offer some support due to Australia's trade ties with China.

US Dollar Index Weakness and Its Effect on the AUD/USD Pair

On the US front, the broad-based US dollar has reversed its losses despite softer US labor data being released on Friday. This has fueled speculation about potential interest rate cuts by the Federal Reserve in 2024.

Richmond Federal Reserve President Thomas Barkin commented that high interest rates could slow US economic growth and reduce inflation, bringing it closer to the Fed's 2% target.

He also mentioned that the strong labor market gives the Fed time to ensure inflation is trending down before cutting rates. However, he warned that continued inflation in the housing and services sectors could keep prices high.

Therefore, the renewed strength of the US dollar due to speculation about future Fed rate cuts could put downward pressure on the AUD/USD pair, as Australia's currency may weaken compared to the US dollar, especially if US interest rates remain high to combat inflation.

AUD/USD Price Chart - Source: Tradingview
AUD/USD Price Chart - Source: Tradingview

AUD/USD - Technical Analysis

In today’s foreign exchange market, the AUD/USD pair is experiencing a notable decline, currently trading at $0.65977, down by 0.43%. This downward movement places the pair just above a significant pivot point at $0.65738, which serves as a potential turning point for future price movements.

The currency pair faces immediate resistance at $0.66460. If overcome, further hurdles await at $0.66907 and $0.67416. These resistance levels will play a critical role in determining the pair's short-term trajectory, especially if bullish momentum resumes.

Conversely, the AUD/USD has established substantial support at $0.65192, with additional lower supports at $0.64669 and $0.64110. These points could provide significant bounce-back potential should the pair continue its descent.

Technical indicators offer a mixed but slightly bearish view. The Relative Strength Index (RSI) is moderately placed at 54, suggesting that there is neither excessive bullish nor bearish momentum currently influencing the market.

However, the proximity of the 50-Day Exponential Moving Average (EMA) at $0.65531 just below the pivot reinforces the pivotal nature of current price levels.

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