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Abstract:  The AUD fell sharply on Wednesday. Before the New York session, the AUDUSD fell more than 1%. The lowest level since June 5.

Fundamentals

Australia's inflation fell more than market expectations in May. The overall CPI fell to 5.6% year-on-year, lower than the previous value of 6.8%, and lower than the market expectation of 6.1%. The inflation rate has now fallen to its lowest level in 13 months. Core inflation also showed a downward trend, and the revised core CPI fell to 6.1% year-on-year, lower than 6.7%, the lowest level in seven months.

Michelle Marquardt, head of price statistics at the Australian Bureau of Statistics, said that the annualized increase of 5.6% this month was the smallest increase since last April. However, if the data of projects with large fluctuations are excluded, the decline of inflation will be moderate.

Australia's inflation eased more than expected in May, which supported the Reserve Bank of Australia (RBA) to suspend its 14-month tightening cycle at next week's policy meeting and led to the decline of the AUD. Because the market has digested, the possibility of suspending the meeting in July is high, about 70%. At present, the market thinks that the possibility of RBA raising interest rates by 25 basis points next week is only 24%.

At the same time, there are signs of further strong economic growth in the U.S. Durable goods orders and new house sales rose and exceeded expectations. In June, the consumer confidence index of the Conference Board jumped from 102.5 to 109.7, the highest level since January 2022. These strong data will support hawkish Fed officials, who have indicated that they plan to raise interest rates twice in the coming months. (negative for AUD)

From the technical chart, there may be room for further decline of the AUDUSD.

After climbing to 0.6901 earlier this month, the AUDUSD fell sharply and fell below an important support level last Friday. Although this sharp and rapid decline seems to be ahead of schedule, there is still room for further decline for the AUDUSD. It fell to the support level on the rising trend line connecting the lows in October 2022 and May 2023. The trend line is currently around 0.6560.

Technical Analysis

The AUDUSD successfully broke through the rectangular interval pattern in the middle of this month and hit a new four-month high of 0.6901. However, this rise proved to be short-lived, and the AUDUSD quickly fell back to the recent range and remained flat in the past few trading days.

Currently, the momentum indicator reflects a complete loss of upward momentum. The RSI is oversold, while the MACD continues to diverge below the 0-axis without any sign of an upward turn.

If the price continues the recent adjustment, the support of 0.6579 may become the first line of defense. If the bears fail to stop here, the AUDUSD may fall to the threshold of 0.6656, and then focus on the secondary bottom of the range of 0.6527 (which is also the starting point of this round of price hitting a four-month high). Breaking this level may open the door for the bottom of 0.6458 in 2023.

On the other hand, if the bulls try to regain the upper hand, they may push the price to 0.6809, the upper end of the rectangular shape. After breaking through this level, bulls can aim at a four-month high of 0.6901. After clearing this level, the AUDUSD may challenge the threshold of 0.6920. But as far as the current form is concerned, it is undoubtedly difficult for AUD bulls.

Overall, the AUDUSD is now extending an even downward Wave 5 after the recent rally lost momentum. If the market can meet our Wave 5 buying points, the bulls' intervention would be a good option. It is recommended to buy with small positions as the starting point.

Trading Recommendations

Trading direction: Long

Entry price: 0.6580

Target price: 0.6724

Stop loss: 0.6450

Deadline: 2023-07-12 23:55:00

Support: 0.6580, 0.6566, 0.6519

Resistance: 0.6637, 0.6662, 0.6721