Bullish view
- Buy the AUD/USD pair and set a take-profit at 0.6800.
- Add a stop-loss at 0.6700.
- Timeline: 1-2 days.
Bearish view
- Set a sell-stop at 0.6725 and a take-profit at 0.6650.
- Add a stop-loss at 0.6800.
The Australian dollar continued its relentless bull run as the odds of a divergence between the Federal Reserve and the Reserve Bank of Australia (RBA) rose. The AUD/USD pair rose to 0.6734 on Monday, its highest level since January. It has risen by over 6% from its lowest swing in May.
RBA and Fed potential divergence
The AUD/USD pair continued rising after a series of high-frequency data confirmed that the US economy was softening. According to the Institute of Supply Management (ISM), the manufacturing and services PMIs dropped to the contraction zone in June.
Another report showed that the country’s labor market softened again in June. While the economy added over 206k jobs in June, the unemployment rate rose to 4.1% and is constantly moving in the wrong direction. Wage growth also softened slightly in June.
Therefore, with the recent data showing that inflation was moving downward, there is a likelihood that the Fed will cut interest rates as soon as in September. The key challenge for the Fed is that a rate cut would lead to accusations of political bias as the US heads to a general election.
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The Reserve Bank of Australia, on the other hand, has signaled that it will be forced to hike interest rates if inflation remains steady. If this happens, it will be the only global central bank hiking rates.
The AUD/USD pair will react to several events this week. Jerome Powell will testify in Congress this week, where he will talk about the next actions. Like in his statement last week, Powell is expected to say that the bank will maintain rates higher for longer.
The other important data will come out on Thursday when the US publishes the latest inflation data. These numbers will be good indicators of when the Fed will start cutting interest rates.
AUD/USD technical analysis
The AUD/USD exchange rate continued rising this week, reaching its highest point in months. It has crossed the important resistance point at 0.6712, its highest point in May this year.
The pair has remained above the 50-day moving average and has formed an inverse head and shoulders pattern. Also, the Relative Strength Index (RSI) has moved slightly above the overbought level.
Therefore, the pair will likely continue rising as buyers target the next psychological point at 0.6800.
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