As risk aversion remains a prevalent theme following a sell-off in markets like equities and crude oil, the AUD/USD pair will likely be in focus this week. The deterioration in US index futures and downbeat sessions in China’s markets indicate the potential for continued volatility. Without significant catalysts to alter the prevailing sentiment, the AUD/USD could face challenges in the coming days.
Key Themes for the Week: Weak Data, Central Bank Rhetoric, and Inflation
Last week’s market theme revolved around weak economic data versus hawkish central bank rhetoric. It remains to be seen if this dynamic changes significantly as volatility persists. The possibility of another 25 basis points interest rate hike has increased, especially if the Fed maintains its hawkish stance, such a possibility appears even more real. Additionally, speeches by heads of the European Central Bank, Bank of England, and Bank of Japan on Wednesday could impact market sentiment.
Macro events such as German Consumer Price Index (CPI) on Thursday and US Core Personal Consumption Expenditures (PCE) on Friday will be closely watched. Inflation data from Canada and Australia will also be of interest. These events may influence the upcoming Reserve Bank of Australia (RBA) rate decision, with market expectations currently pricing in a 25 basis point rate hike.
Market Struggles Stemming from Central Bank Actions and Global Economic Concerns
Markets are currently grappling with concerns that central bank actions could lead to a hard landing for the global economy, already affected by high prices. Inverted yield curves, falling crude oil prices despite OPEC cuts, and weak equity markets, particularly in China, reflect these apprehensions.
Last week, global Purchasing Managers’ Index (PMI) readings indicated weaker economic activity, with manufacturing remaining in contraction territory and deteriorating in most cases. Investors remain worried about the potential onset of a recession. The release of German Ifo data today further heightened these concerns, pushing the German DAX index to its lowest level of the month.
Technical Outlook: US Dollar to Australian Dollar Facing Potential Weakness
The AUD/USD pair experienced a significant decline last week, signalling the possibility of further losses as the price attempts to break the 200-day moving average.
With the AUD/USD closing below the critical breakout level of 0.6800, a bullish failure is evident, potentially indicating further weakness this week. A similar price action occurred earlier this month when a breakdown below key support at 0.6580 failed to lead to a sustained downside move. At present, the 1 AUD to USD is trading below the next support level, near 0.6700 and is also below the 200-day average. A close below this level could pave the way for a retest of the 0.6580 support level.
Bulls seeking long opportunities will likely wait for a confirmed bullish reversal, such as the formation of a hammer or a double-bottom pattern. A significant bullish development would be a move above the 0.6800 level, signalling potential upward momentum for the AUD rate.