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Abstract: The Reserve Bank of Australia kept its benchmark interest rate unchanged on Tuesday after inflationary pressures cooled and household spending weakened, opening the door to future interest rate hikes.

Fundamentals

On Tuesday, the second consecutive suspension of interest rate hikes indicated that the Reserve Bank of Australia (RBA) may be approaching the end of its tightening cycle.

The AUDUSD weakened to 0.6663 after the interest rate resolution was announced, while the yield on the interest rate-sensitive three-year government bond fell to 3.82%. The decision underscores the more cautious policy stance of the RBA compared to the Fed.

The Fed raised interest rates by 25 basis points last week, bringing its cumulative rate increase to 525 basis points, much higher than Australia's 400 basis points. To some extent, this reflects that the RBA's interest rate hike has been quickly transmitted to the borrowers in Australia, who are mainly floating-rate mortgages, while most people in the U.S. are 30-year fixed-rate mortgages.

The continued decline of the AUDUSD shows that the market does not want to believe that the RBA will definitely not raise interest rates again, but they made it clear that they do not think that interest rate hikes will occur until at least November. This should provide a broader prospect for investors who are bullish on AUD bonds in the next few weeks, and it will take some major data surprises to disturb their mood.

Overnight index swaps show that the probability of raising interest rates before October is slightly lower than 40%, however, the probability of raising interest rates by November is 60%. Traders believe that if policymakers want to raise interest rates again, it is likely to happen in December or February next year. This situation emphasizes the importance of quarterly CPI reports to the Reserve Bank of Australia. Traders predict that if the Q3 data released in October shows that inflation continues to cool down again, the RBA is likely to announce a suspension of interest rate hikes.

Technical Analysis

The AUDUSD tumbled on Tuesday following the RBA's decision not to raise interest rates, accelerating its decline after falling all the way below the July 28 low of 0.6620. For now, the price structure below the AUDUSD's downtrend line to the July 14 peak remains characterized by lower highs and lower lows, which keeps the short-term outlook bearish.

After consecutive sell-offs, the AUDUSD is in negative momentum on both the RSI and MACD on Wednesday, confirming the bearish view that the AUDUSD may continue to hold for some time. The Relative Strength Index sits at the 30 level, while the MACD is diverging below the 0-axis.

A decisive break below 0.6560 would confirm an impending lower low in the 4H timeframe, which could initially target the 0.6520 range, which provided support on June 1. If bears are unwilling to stop there, they could march towards the 0.6458 level, which was resistance back in May.

The "double top" pattern was indeed created after the bears broke below the 0.6600 level. The bulls still have a lot of work to do to brighten the outlook for the AUDUSD. The rebound at the D-point is their last chance. If the price fails to rebound significantly here, the AUDUSD could fall into a medium-term downtrend.

On the bright side, they may need to climb all the way above the 0.6740 range, as only a break above that level can change the downward pattern. The next stop for the bulls is around 0.6850, a break of which could extend to the threshold of 0.6895, which prevented the bulls from rising further in June and July.

Overall, the AUDUSD will continue to be hit hard after the RBA decides to remain on hold, and the overall outlook suggests that the near-term downtrend could continue. However, it may stop the downtrend at the key levels we preset. If it does, it will be an opportunity to go long in the short term. It is recommended to buy the dips.

Trading Recommendations

Trading direction: Long

Entry price: 0.6517

Target price: 0.6713

Stop loss: 0.6380

Deadline: 2023-08-16 23:55:00

Support: 0.6539, 0.6517, 0.6458

Resistance: 0.6594, 0.6681, 0.6739