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Summary: The market currently anticipates that the Reserve Bank of Australia (RBA) will maintain the cash rate at 4.35% in this Tuesday's rate meeting. Nevertheless, the RBA might signal a hawkish stance and pause to dampen speculation about rate hikes in 2024, given that the inflation rate remains elevated at 4.9%, significantly above the 2% target.

Fundamentals

The AUDUSD pulled back from multi-month highs and the downside appears limited ahead of Tuesday's RBA meeting.

For the RBA, another rate hike is certainly unlikely this week after raising rates by 25 basis points in November due to the recent much weaker-than-expected inflation data for October. While we may have already seen the peak in Australian rates, there is still a possibility of eventual tightening in the first quarter of 2024. By then, the base effect may make it challenging for inflation to continue declining unless the month-on-month data slows significantly.

In addition, the Australian economy is set to grow at a slower pace of 0.3% in the third quarter after a 0.4% month-on-month increase in GDP in the second quarter, which is in line with the 1.2% year-on-year growth rate, slightly stronger than the prevailing view. Net exports may weigh on economic growth this quarter, but this could be partially offset by an increase in inventories. Private investment could see moderate growth, and the construction sector remains quite robust. Consumer spending, which has been slowing, might show more resilience than expected, with some positive retail sales data in the third quarter.

HSBC has raised its forecasts for Australian inflation and GDP growth in 2023 and 2024, citing a larger-than-expected population surge. HSBC currently expects overall GDP growth in Australia to be 2.0% in 2023, higher than the previous forecast of 1.7%, and GDP growth in 2024 is expected to be 1.5%, up from the previous forecast of 1.2%.

The CPI inflation rate for 2023 is expected to rise from 5.5% to 5.7%, and the 2024 forecast is expected to increase from 3.1% to 3.5%.

HSBC Chief Economist Paul Bloxham also mentioned that they expect the RBA not to further hike rates, partly because most other major central banks, including the Fed and the European Central Bank, are unlikely to hike rates again.

Technical Analysis

From a technical perspective, the AUDUSD has recently made significant breakthroughs, notably surpassing the crucial 200-day SMA and closing above the 61.8% Fibonacci retracement level of the decline from July to October, which is seen as a new bullish trigger.

Furthermore, the oscillating indicators in the daily chart comfortably sit in the positive territory, with considerable distance from the overbought territory. This indicates that, against the backdrop of dovish expectations from the Fed, the path of least resistance for the AUDUSD is upward.

As long as the bulls can hold the support level at 0.6570, there is potential for further rebound. A sustained break above the channel resistance (currently at 0.6652) indicates that the overall downtrend from 0.7156 to the three-wave decline to 0.6269 has been completed. Subsequent attention should be given to confirming further rebound to the resistance level at 0.6894. However, a break below the support level at 0.6570 will indicate a rejection of this channel and a shift back towards a downward trend.

Structurally, as seen in the chart, recent price movements have been volatile. While the path of least resistance for the AUDUSD is upward, the upside potential appears crowded for structural trading. The market may experience a correction first before further upward movement. In terms of trading, the main strategy is to buy low and sell high.

Trading Recommendations

Trading Direction: Short

Entry Price: 0.6650

Target Price: 0.6459

Stop Loss: 0.6700

Valid Until: 2023-12-18 23:55:00

Support: 0.6600, 0.6572, 0.6541

Resistance: 0.6675, 0.6690, 0.6738