Aussie Weakens on RBA’s Dovish Statement

Aussie Weakens on RBA’s Dovish Statement

 
The strong recovery in the Euro zone economy and a decrease in risk from political events has turned the Euro bullish against the greenback, Pound and even the Australian dollar. While the price of iron ore continues to hold above $70 per ton, the outlook is bearish. Still, the Australian dollar was able to hold on to its turf mainly because of the interest rate differentials against the Euro, and expectations of a rate hike. However, the recent statement from the Reserve Bank of Australia, poor retail sales and consumer price data is supporting a rally in the EURAUD pair, which is trading at around 1.5700, as detailed below.

On Tuesday, the Reserve Bank of Australia left the benchmark interest rate at 1.5%, following the conclusion of the monetary policy meeting. The decision did not surprise the market. However, the dovish statement that accompanied the monetary policy decision turned the Australian dollar weak. The central bank finished by saying “The low level of interest rates is continuing to support the Australian economy.”

The bank further stated “Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.”

The statement clearly indicated that the RBA is no mood to rush with an interest rate hike. Before the statement was issued, the interest rate derivatives market had priced a 50% chance of a rate hike in August. After the statement was issued, the odds of a rate hike decreased to 30%.

Separately, on Tuesday, the Australian Bureau of Statistics reported a 0.5% m-o-m decline in retail sales in December, compared with an upwardly revised growth of 1.3% in the previous month. Analysts polled by Reuters had expected a 0.2% decline in December retail sales. Notably, on the last day of January, the Australian Bureau of Statistics had reported a 0.6% rise in the consumer price inflation in the December quarter, missing Reuters median Consensus of 0.7%. The RBA’s dovish statement coupled with poor retail sales and inflation data has turned the Australian dollar weak.

The Euro zone, in the meanwhile, is bustling with economic activity. The probability of the ultra-nationalist, anti-EU five star party coming to power in Italy has considerably declined. Based on those facts, investment research firm JP Morgan has forecast a progressive strengthening of the euro in 2018. JP Morgan’s economists have also upgraded their outlook for the Eurozone economic growth. Economists now expect a GDP growth of 2.9% in 2018, representing a full 1% increase from the previous forecast. The strengthening Euro zone economy would also encourage the ECB to wind down the stimulus at the earliest, while normalizing the interest rates.

Secondly, Trump’s tax reform was expected to result in a huge outflow of funds from the Europe. However, it has not happened so far, excluding the most talked about repatriation by Apple. Therefore, JP Morgan analysts believe that it would not affect the Euro zone economy in a considerable manner. Thus, fundamentally, we can expect the Euro to rally against the Australian dollar.

Technically, the EURAUD pair has broken the resistance at 1.5700. The currency cross is also trading above the 50-day moving average. Furthermore, the money flow index is about to cross the reading of 50. That indicates the possibility of a continuation of the current uptrend. Thus, we anticipate the EURAUD pair to move up in the days ahead.

EURAUD - Technical Analysis - 8th February 2018

To benefit from the breakout, we are planning to establish a long position in the EURAUD pair near 1.5700, with a stop loss order below 1.5610. If the rally begins as expected, we would book our profit near 1.5950.

We may also purchase a call option, while opening a long position in the Forex market. The option contract offered by a binary broker should be active for a week. Additionally, in order to enter the trade, we require the EURAUD pair to trade near 1.5700.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.


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