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Abstract: Australia's inflation fell more than expected in the second quarter, as the pressure on the Reserve Bank of Australia (RBA) to raise interest rates eased, leading to a lower AUD. Before the Federal Reserve announced interest rates, the AUDUSD remained above the 200-day SMA. At present, the trend of the UADUSD will wait for the reaction after the news is announced. If the AUDUSD can rise sharply and form higher volatility high, then the bullish trend will continue.

Fundamentals

In the three months to June, Australia's inflation rate slowed down more than expected, reflecting the global trend and providing a reason for the Reserve Bank of Australia to suspend interest rate hikes again at its policy meeting next week. According to the published data, the CPI in the second quarter increased by 6% compared with the same period of last year, which was lower than the market expectation of 6.2%.

The positive inflation data was destroyed to some extent by the inflation in the service industry, which accelerated to 6.3% in the second quarter, the highest level since 2001. According to the Australian Bureau of Statistics, a key factor pushing up inflation in the service industry is the increase in rents.

The RBA will hold a meeting on August 1. After the positive inflation report was released, investors reduced the possibility of raising interest rates. According to the data of the RBA interest rate tracking system of the Australian Securities Exchange, the possibility of raising interest rates has dropped from 41% before the inflation report was released to 31%.

The RBA currently predicts that inflation will return to the top of the 2-3% target range by mid-2025. RBA Chairman Lowe said that after raising interest rates 12 times in the past 15 months, the RBA is currently in a data-dependent mode.

What will happen after August? Extending the suspension is the first choice of the RBA, but it may require inflation to continue to fall, close to the 2% target. Otherwise, the RBA still has a lot of work to do on inflation and may have to continue to tighten interest rates.

It is widely expected that the Federal Reserve will raise interest rates at Wednesday's meeting, and investors' expectations for raising interest rates are close to 100%. This will bring the benchmark interest rate to the range of 5.25%–5.50%. Investors expected to suspend interest rate hikes in September, but the Fed hinted that it would raise interest rates again after Wednesday's meeting. The Fed's interest rate policy will also depend on the inflation level and labor market data to a great extent.

The support of the AUDUSD around 0.6735 may be tested because "the possibility that the RBA will raise interest rates next week is weakened. Considering the rising inflation in the service industry and the expectation of further acceleration of salary growth, there is still the possibility of raising interest rates, "but this is something in the next few months." It is expected that AUDUSD will be in range trading on the eve of the Fed meeting, so it is unlikely to continue to fall below 0.6684.

Technical Analysis

The AUDUSD almost regained recently lost ground after Australia's Q2 inflation data. However, it did not continue to gain ground during the European session. At the time of writing, the AUDUSD was trading near its intraday low, 0.6736, after accumulating a 0.50% loss on the day.

From the technical charts, the AUDUSD shows signs of further weakening. If the decline is extended to 0.6730, the low starting point of 0.6714 will be easily broken, thus testing the level of 0.6684 in the pre-demand area.

Moreover, against the backdrop of the development of a bearish double top near the threshold of 0.6900, a convincing break below the 0.6684 level would set the stage for a continuation of the recent pullback from the monthly highs. Subsequently, spot prices could accelerate their slide toward the 0.6684-0.6594 fluctuation range. Some subsequent selling will validate the bearish pattern. The recent long pattern will be absent.

On the other hand, the threshold of 0.6684 is also an important watershed for both bulls and bears. It is also a key level to test whether the bulls can return above 0.6900. If the bulls continue to hold above such a threshold, some follow-through buying will negate the recent bearish pattern and push the spot price up to the next key resistance around the 0.6970-0.6975 range and lay an important foundation toward the psychological barrier of 0.7000.

Overall, the focus of the competition between bears and bulls is on the gain or loss of the key level of 0.6684. Given the previous breakout higher, we believe that the momentum should be to the upside and not stop there. It is recommended to buy the dips.

Trading Recommendations

Trading direction: Long

Entry price: 0.6684

Target price: 0.6972

Stop loss: 0.6560

Deadline: 2023-08-09 23:55:00

Support: 0.6714, 0.6684, 0.6622

Resistance: 0.6795, 0.6847, 0.6896