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Abstract: In early Asian and European trading on Monday, the AUDUSD extended Friday's rally and accelerated to test a 4-week high of 0.6800. While the upside action remains strong, there is still a long way to go before the short-term outlook turns bullish.

Fundamentals

The Australian dollar outperformed last week with a cumulative gain of 2.1%. Earlier on Monday (5th), Australia kicked off the week with consumer and business confidence data. Consumers continue to struggle with the cost of living crisis, while businesses grapple with uncertain economic conditions and high interest rates. Meanwhile, the Australian dollar continues to find support from the unexpected 25-basis-point rate hike by the Reserve Bank of Australia (RBA) and the more hawkish policy statement.

While multiple factors have hindered aggressive bullish bets and limited upside potential, the fact remains that the RBA's move to raise the benchmark interest rate above 4% for the first time in nearly 12 years, as defended by Governor Lowe last Wednesday, and the reiterated possibility of further rate hikes to curb overheating inflation have played a role in driving the AUDUSD higher, at least for now.

In the U.S., there are many important data releases on the economic calendar this week, with inflation reports scheduled for Tuesday and the Federal Open Market Committee rate decision on the following day.

The market currently expects a continued slowdown in inflation for May. The headline inflation rate is projected to drop from 4.9% to 4.1%, while the core rate is expected to decrease from 5.5% to 5.3%. Currently, market interest rates are pricing in a significant move, with the likelihood of a pause rising sharply from 70% last Friday to 80% today. However, inflation data released the day before the Fed meeting could change the Fed's policy expectations. If inflation falls, it could lead to a pause. However, if inflation continues to move higher, all bets on the market will fall short and we could see a rate hike.

However, if the Fed chooses not to raise rates, as expected, the market will scrutinize the rate statement and Fed Chair Powell's press conference to see if the no-rate hike is only temporary or not, and resume another rate hike in July.

During the "quiet period" of the past 10 days, we haven't received any messages from Fed officials, but prior to that, several Fed officials have indicated that even if the Fed pauses rate hikes in June, the door for further policy tightening will remain open.

Technical Analysis

The AUDUSD has been declining within a range since early May. However, after the unexpected 25 basis point rate hike by the Reserve Bank of Australia, the currency pair rebounded steadily from its 2023 low of 0.6457 and successfully broke above the 200-day, 89-day, and 100-day SMAs.

For now, momentum indicators continue to reflect a cautiously positive tone. The RSI is hovering above its neutral level of 50, while the MACD is strengthening below the 0-axis but remains in negative territory.

If the bulls manage to push the price higher, they will face pressure from the 38.2% Fibonacci retracement of the uptrend that occurred between October 13, 2022, and February 2, 2023. This level also coincides with a supply zone where the currency pair recently dropped to the 0.6457 level, suggesting there may be a further battle within this range. Breaking above this zone could open the door for a test of 0.6920 before reaching 0.7030.

However, we do not anticipate a continuation of the uptrend. On the contrary, the price will fall back quickly after testing the supply zone. A break above the previous high of 0.6819 will be a challenge for the bulls later. This means that the price will fall into consolidation again.

Overall, the AUDUSD has rebounded sharply from its 2023 lows to recover lost ground, but it still has a long way to go before the short-term outlook turns bullish. To achieve such a scenario, the bulls must first break above 0.6819, otherwise, the bias may shift to the downside. From a trading perspective, going short at highs would be preferred.

Trading Recommendations

Trading Direction: Short

Entry Price: 0.6800

Target Price: 0.6610

Stop Loss: 0.6950

Valid Until: 2022-06-26 23:55:00

Support: 0.6753, 0.6730, 0.6717

Resistance: 0.6781, 0.6807, 0.6819