AUD/USD consolidates under 0.7000 level at 18-month lows, focus turns to key RBA meeting/US data next week

• After dipping to fresh 18-month lows under the 0.7000 level, AUD/USD has been consolidating.
• There are now not any major levels of support until the 0.6775 area, which coincides with a key 50% Fibonacci.
• Strong US data next week could further spur dollar gains if it further spurs Fed tightening bets.
• Already very hawkish RBA expectations reduce the scope of a hawkish surprise at next week’s meeting that could lift AUD.

After dipping to fresh 18-month lows underneath the 0.7000 level during morning European trade, AUD/USD has been consolidating just below the big figure. The pair was momentarily able to reclaim 0.70 status in wake of data showing an easing of US wage inflation pressures, which triggered some dollar profit-taking and paring back on Fed tightening bets. That dollar weakness didn’t last long, with Core PCE inflation data showing inflationary pressures remained highly elevated at the end of 2021.

Now that AUD/USD has cleared key levels of support at 0.7000 in the form of the 2021 and Q4 2020 lows, technicians turn their attention to the next support zone. There is arguably some support in the 0.6920s and 0.6840s, but nothing major until the 0.6775 area. This level happens to roughly coincide with the 50% Fibonacci retracement back from the post-pandemic at roughly 0.8000 to the post-pandemic low at roughly 0.5500.

Despite having already lost 2.5% on 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 plenty to focus on, with the RBA monetary policy announcement on Tuesday followed by a monetary policy statement on Friday, as well as key January US data releases (ISM survey and official jobs data). Friday’s sensitivity in the US dollar to the latest Q4 Employment Cost Index suggests things could get volatile if next week’s official jobs data surprises.

Meanwhile, some might argue that next week’s RBA meeting is one of the most highly anticipated in years. The bank is expected to axe its QE programme and faces immense market pressures to drastically shift its rate hike guidance. At the moment, the RBA board says it doesn’t see the conditions for rate hikes being met until 2023 at the earliest. That compares to money market pricing for a first rate hike as soon as May and a recent Reuters poll of economists where the median expectation was for the bank to hike rates in November.

Unfortunately for the AUD/USD bulls, the fact that market expectations have gotten so far ahead of the RBA’s stance means that even if they do complete a sizeable hawkish pivot on their current position (i.e. pointing to hikes by end-2022) the scope for a hawkish surprise that would lift the battered Aussie is low.