Bullish view
Bearish view
- Sell the AUD/USD pair and set a take-profit at 0.6890.
- Add a stop-loss at 0.7000.
The AUD/USD price retreated on Monday and Tuesday as last week’s bullish momentum waned. It retreated to a low of 0.6953, which was lower than last week’ high of 0.7021. The pair has been in a strong uptrend in the past few months as the US dollar index retreated from a high of $115 to about $102.
Falling inflation expectations
The AUD/USD price has been in a bullish trend in the past few months. The main reason for this comeback is the retreating US dollar, which has fallen by more than 10% from its peak in 2022. Analysts believe that the Federal Reserve will be less hawkish in 2023 than it was in 2022. During that year, the bank moved rates from 0% to over 4%.
Recently, however, inflation and inflation expectations have been falling. Last week, data by the American statistics agency showed that the headline consumer inflation dropped for the sixth straight month in December. Further, inflation expectations, as measured by the 10-year breakeven inflation rate has plunged to the lowest point since January 2021.
A closer look at key inflation contributors shows that their prices have been in a freefall. A good example of this is electric vehicles made by Tesla. Used Teslas have seen their prices crash by more than 20% in the past few months. Similarly, Tesla has been forced to slash prices of its new models in the US and China.
Therefore, some analysts believe that the US could move into a deflation in the next few months. If this happens, the Fed will be under pressure to continue tightening.
There will be no data from the US and Australia on Tuesday. Therefore, investors will be focusing on the upcoming US producer price index (PPI) and December’s retail sales. Expectations are that retail sales did well in December while the PPI dropped slightly.
AUD/USD forecast
The AUD/USD price pulled back ahead of the upcoming US retail sales and PPI numbers. On the 4H chart, it dropped from a high of 0.7020 to a low of 0.6950. It is slightly above the lower line of the ascending channel shown in red. The pair remains above the 25-day and 50-day moving averages and the important support at 0.6893.
Therefore, this temporary retreat could see it drop to the lower side of the channel and then resume the bullish trend. The next key level to watch will be at 0.6920.
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