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Summary: The Australian dollar has seen a rebound as the U.S. Dollar Index remains in sell-off mode following a significant cooling in the U.S. June inflation report. The next target for the AUDUSD pair appears to be 0.6970.

Fundamentals

Australian interest rate traders are betting on the possibility of a rate hike next month after Reserve Bank of Australia (RBA) Governor Philip Lowe warned about the need for cash rates to rise higher to contain inflation.

One-year ahead consumer inflation expectations in Australia remain stable at 5.2%, while investors expect it to decrease to 5.1%. This will hinder further rate hikes by the RBA.

Lowe stated yesterday that it remains to be determined whether there is more work to be done on monetary policy. This sounds relatively dovish compared to last week's statement.

The Overnight Index Swap (OIS) contracts for the August meeting period have dropped below 4.2%, indicating a probability of a rate hike of around 50%, down from Monday's 68%.

Employment and inflation data to be released this month may play a decisive role in the RBA's actions, but the market believes that the central bank has a very open stance towards these data.

We anticipate that as the market begins to consider the possibility of a rate cut by the Fed, the U.S. dollar will continue to decline, while the Australian dollar will experience some upside. We believe that the AUDUSD pair may continue to accelerate its upward testing, taking advantage of the U.S. dollar sell-off, and reach 0.7000 before the end of the year.

Technical Analysis

The AUDUSD bulls continued to accelerate to the upside on Thursday, on track for a second breakout from the wide-ranging consolidation pattern that has been in place since March this year. However, for trading purposes, the sustained upward movement will put stop-loss orders to the test.

From a technical perspective, the outlook is positive for the bulls. The momentum indicator, RSI, has risen above the 50 level and is currently attempting to establish higher highs. More importantly, the stochastic oscillator has crossed above its moving average and is trending upwards in a vertical manner. If we add the convergence of the rare Simple Moving Average (SMA) to this combination, the market will likely witness a decisive upward trend.

Currently, our first resistance level stands at 0.6965, which is close to the previous selling point and also serves as a supply zone.

On the other hand, the bears are eagerly trying to limit the current trend, but only the Average Directional Index (ADX) is on their side, as it continues to signal a range-trading market. They are keen on pushing the AUDUSD back into the aforementioned range and then attempting to sell off at the 38.2% Fibonacci retracement level of 0.6739. Even lower, the bears will encounter a more active range between 0.6680 and 0.6712.

Overall, another bullish breakout is underway for the AUDUSD, and the bulls seem quite confident. However, for trading purposes, continuing to chase the rally is clearly not our option. The target level is already too close for comfort for the bulls, and the risk is higher as well. After careful consideration, we prefer to choose the path with the least risk. In terms of trading strategy, it's recommended to go short at highs.

Trading Recommendations

Trading Direction: Short

Entry Price: 0.6950

Target Price: 0.6720

Stop Loss: 0.7050

Valid Until: 2023-07-27 23:55:00

Support: 0.6807, 0.6716, 0.6721

Resistance: 0.6900, 0.6919, 0.6936