Cautious Reserve Bank of Australia (RBA) to Thwart AUD/USD Rebound

Reserve Bank of Australia (RBA) to Keep Official Cash Rate at 1.50%.

Will Governor Philip Lowe Continue to Endorse a Wait-and-See Approach?

Trading the News: Reserve Bank of Australia (RBA) Interest Rate Decision

DailyFX Calendar

The Reserve Bank of Australia (RBA) interest rate decision may generate a limited market reaction as the board is widely expected to keep the official cash rate at the record-low of 1.50%, but the fresh batch of central bank rhetoric may undermine the recent rebound in AUD/USD if Governor Philip Lowe & Co. show a greater willingness to further embark on the easing-cycle.

Why Is This Event Important:

The RBA may continue to endorse a wait-and-see approach as ‘growth is expected to increase gradually over the next couple of years to a little above 3 percent,and the central bank may merely attempt to buy more time as ‘the outlook continues to be supported by the low level of interest rates.However, Governor Lowe may adopt a more caution tone after Standard and Poor’s reduced the credit rating for 23 Australian financial firms, and the local currency stands at risk of facing near-term headwinds should the central bank highlight a dovish outlook for monetary policy.

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Impact that theRBA rate decision has had on AUD/USD during the previous meeting

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

MAY

2017

05/02/2017 04:30 GMT

1.50%

1.50%

+2

-6

May 2017 Reserve Bank of Australia (RBA) Interest Rate Decision

AUD/USD 5-Minute

AUD/USD Chart

As expected, the Reserve Bank of Australia (RBA) kept the official cash rate at the record-low of 1.50% in May, and it seems as though the central bank is in no rush to move away from its accommodative policy stance as Governor Philip Lowe and Co. warn ‘the outlook continues to be supported by the low level of interest rates.’ Despite the initial tick higher in AUD/USD, the market reaction was short-lived, with the exchange rate pulling back from a session high of 0.7556 to end the day at 0.7534.

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How To Trade This Event Risk(Video)

Bearish AUD Trade: RBA Adopts Dovish Tone, Tames Interest Rate Expectations

  • Need a red, five-minute candle following the policy meeting to favor a short AUD/USD trade.
  • If the market reaction favors a bearish aussie position, sell AUD/USD with two separate lots.
  • Set stop at the near-by swing high/reasonable distance from entry; look for at least 1:1 risk-to-reward.
  • Move stop to breakeven on remaining position once initial target is met, set reasonable limit.

Bullish AUD Trade: Governor Lowe Endorses Wait-and-See Approach

  • Need a green, five-minute candle to favor a long aussie trade.
  • Implement the same strategy as the bearish AUD setup, just in the opposite direction.

Potential Price Targets For The Release

AUD/USD Daily

AUD/USD Daily Chart

Chart – Created Using Trading View

  • AUD/USD fails to extend the bearish sequence from the previous week following the lackluster U.S. Non-Farm Payrolls (NFP) report, and the pair may stage a larger rebound over the coming days as it appears to have made a failed run at the May-low (0.7329); keep in mind the broader outlook for AUD/USD remains relatively flat as it continues to operate within the 2016-range.
  • Will be keeping a close eye on the Relative Strength Index (RSI) as it comes up against trendline resistance; may see the oscillator flash a bullish trigger as it threatens the downward trend carried over from February.
  • With that said, AUD/USD may make a more meaningful attempt to clear the topside hurdle around 0.7500 (50% retracement) to 0.7530 (38.2% expansion) as it trades above the 50-Day SMA (0.7491) for the first time since March, with the next topside region of interest coming in around 0.7580 (38.2% retracement) to 0.7600 (23.6% retracement).
  • Interim Resistance: 0.7730 (61.8% retracement) to 0.7770 (61.8% expansion)
  • Interim Support: 0.7150 (161.8% expansion) to 0.7180 (61.8% retracement)

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IG Sentiment

Retail trader data shows 44.5% of traders are net-long AUD/USD with the ratio of traders short to long at 1.24 to 1. The number of traders net-long is 2.9% lower than yesterday and 11.7% lower from last week, while the number of traders net-short is 17.9% higher than yesterday and 5.7% lower from last week.For more information on retail sentiment, check out the new gauge developed by DailyFX based on trader positioning.

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— Written by David Song, Currency Analyst

To contact David, e-mail [email protected] Follow me on Twitter at @DavidJSong.

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