Bearish View
- Sell the AUD/USD pair and set a take-profit at 0.6640.
- Add a stop-loss at 0.6850.
- Timeline: 1-2 days.
Bullish View
- Set a buy-stop at 0.6800 and a take-profit at 0.6900.
- Add a stop-loss at 0.6700.
The AUD/USD pair retreated in the American and Asian sessions as worries about a recession converged with hawkish central bank policies. It dropped to a low of 0.6765, which was the lowest level since June 2020.
Recession Fears and Rate Hikes
The AUD/USD price declined sharply as fears of a recession spread around the world. These fears led to a major bond sell-off that pushed American and Australian yields higher. Wall Street stocks and commodities like gold and crude oil also crashed.
Therefore, there are concerns that the ongoing policies by central banks will exarcebate the situation. Historically, central banks tend to ease policies when there are fears of a recession. This time, however, most banks have embraced a more hawkish tone in a bid to deal with the soaring inflation.
On Tuesday, the Reserve Bank of Australia (RBA) decided to deliver its third interest rate hike of the year. It made its first back-to-back 0.50% hike in almost three decades. Most importantly, officials ware that another 0.50% hike cannot be ruled out as long as inflation remains stubbornly higher.
In a statement, Philip Lowe said that the aggressive rate hikes are necessary to slow spending and bring inflation near its 2% target. Still, he agreed that these hikes will not be enough to lower inflation. The bank anticipates that rates will end the year at about 7%. In addition to the war in Ukraine, the other important causes of inflation in Australia are the ongoing floods and capacity constraints.
The next key catalyst for the AUD/USD will be the upcoming FOMC minutes. These minutes will provide more color about the deliberations that happened in the previous meeting. The most important thing to watch will be whether some officials are concerned about the fast pace of tightening.
AUD/USD Forecast
The AUD/USD pair declined sharply even after the latest hawkish decision by the RBA. On the 4H chart, the pair has moved below the important psychological support at 0.6800. It also dropped below the Woodie pivot point and is now approaching the first support.
The pair declined below the 25-day and 50-day moving averages. Therefore, the path of the least resistance for the pair is lower, with the next key support being at S2 of the Woodie pivot point at 0.6640. The stop-loss for this trade is at the pivot at 0.6840.
