The following guest post is courtesy of ATFX.
The Australian dollar is always interesting to trade, but early next week it will be even more interesting. The markets are giving it a 50% probability that the central bank will reduce interest rates by 25 basis points at their May 7th meeting, and if they indeed go ahead, we may see a large bearish move in the AUDUSD, while leaving rates unchanged might see the AUD gain.
Following the latest inflation report, the outlook for an RBA rate cut increased. Inflation has failed to gain momentum and has maintained a 1.3% annual rate for about two years. The 1.3% reading is lower than the central banks 2 to 3 percent target range. Economists are, however, projecting a rise in the next few months and we might see inflation rise to 1.6%, as crude oil prices have rallied sharply from their December lows, however, a 1.6% reading will still be too low for the RBA.
Looking at annual core inflation, the outlook remains gloomy, and the annual pace of core inflation is projected to remain around 1.4%, a reading that is way too low for the liking of the RBA.
Low inflation figures are not the only reason to have a bearish outlook for the Australian dollar; economic growth has remained soft for almost a year and economist project the RBA to lower their GDP forecast. Also, house prices are falling sharply in Australia’s largest cities and should deter people’s consumption. As a consequence, one of the biggest banks in Australia is now suggesting, rate cuts will take place in August and May.
As for the technicals, the AUDUSD is trapped within 0.6977 and 0.7204, and the charts suggest that we are dealing with an ascending triangle, which suggests that AUDUSD might trade to about 0.6660, on a break to the 0.6977 level. However, until the price breaks the 0.6977 and 0.7204 levels, the AUDUSD will remain range-bound, and the technicals suggest that we should wait for a break to the range.