AUD/USD Consolidates Below 0.7000 At 18-Month Lows, Focus Turns To Key RBA/US Data Meeting Next Week

• After falling to fresh 18-month lows below the 0.7000 level, the AUD/USD has been consolidating.
• Now there are no major support levels until the 0.6775 area, which coincides with a 50% Fibonacci level.
• Strong US data next week could further fuel dollar gains.
• RBA expectations, already very aggressive, reduce the scope of a surprise at next week’s meeting that could boost AUD.

After falling to fresh 18-month lows below the 0.7000 level during morning European trade, the AUD/USD it has been consolidating just below the big figure. The pair was able to momentarily reclaim the 0.70 status on the back of data showing easing wage inflation pressures in the US, triggering dollar profit-taking and lower wage-setting bets. Fed. That dollar weakness didn’t last long, as core PCE inflation data showed inflation pressures remained very elevated at the end of 2021.

Now that AUD/USD has broken through key support levels at 0.7000 in the form of 2021 and Q4 2020 lows, technicians turn their attention to the next support zone. Arguably there is some support at 0.6925 and 0.6845, but nothing major until the 0.6775 area. This level roughly coincides with the 50% Fibonacci retracement from the post-pandemic at about 0.8000 to the post-pandemic low at about 0.5500.

Despite already losing 2.5% for the week, most would agree that AUD/USD’s recent break below 0.7000 leaves it very vulnerable from a technical perspective. Next week, AUD/USD traders will have a lot to focus on, with the RBA’s monetary policy announcement on Tuesday followed by a monetary policy statement on Friday, as well as key US data releases. January (ISM survey and official employment data). Friday’s sensitivity in the US dollar to the latest Q4 Employment Costs Index suggests things could turn volatile if next week’s official jobs data surprises.

In the meantime, some might argue that next week’s RBA meeting is one of the most anticipated in years. The bank is expected to scrap its QE program and faces immense market pressure to drastically change its rate hike guidance. At the moment, the RBA board says it does not see the conditions for rate hikes being met until 2023 at the earliest. That compares with money market prices for a first rate hike in May and a recent Reuters poll of economists in which the median expectation was for the bank to raise rates in November.

Unfortunately for AUD/USD bulls, the fact that market expectations have gotten so far ahead of the RBA’s stance means that even if they complete a sizeable aggressive pivot on their current position (i.e. target late 2022), the scope for an aggressive surprise that would lift the battered Australian dollar is low.

Technical levels