Strong ISM Manufacturing Data Turns Greenback Bullish

Strong ISM Manufacturing Data Turns Greenback Bullish

 

The AUDUSD pair rallied yesterday after the Australian Bureau of Statistics reported better-than-anticipated retail sales in May. The warning issued by Japan for the US plans to levy tariffs on imported cars and car parts weakened the greenback. However, we believe the situation is only temporary and that the greenback will bounce back against the Aussie based on the details given below.

During the monetary policy meeting conducted on Tuesday, the Reserve Bank of Australia held the interest rate unchanged at a record low of 1.5%. The RBA also issued an optimistic statement about the economy. Additionally, the central bank stated that it is confident about the wage growth outlook and comfortable about the prevailing level of the Australian dollar. This means that the RBA is in no hurry to raise the interest rates, which is totally contradictory to the approach of the central bank of other developed countries.

The inflation rate is expected to stay near the lower range of the RBA’s target of between 2% and 3% in 2018. According to analysts at ABN AMRO, this has turned the outlook for the Australian interest rates gloomy. The looming trade war between the US and China, which is Australia’s major importer of commodities, is also expected to keep the Aussie bearish in the short-term.

In the US, the Institute for supply management stated that the Manufacturing Index grew to 60.2 in June, up from 58.7 in the previous month. Economists had expected the manufacturing index to decline to a level of 58.2. In addition to the economic data, the US dollar is also buoyed by strong corporate inflows. The US enterprises have repatriated $175 billion of earnings retained overseas. The tax cuts announced by the US Congress have left American households with an average additional disposable income of $1,200. All these factors have turned the greenback bullish. Therefore, fundamentals favour a decline of the AUDUSD pair in the week ahead.

Technically, the AUDUSD pair has broken the support at 0.75. The next major support is expected only at 0.7160. Furthermore, the MACD indicator is in the negative region. Therefore, we are expecting the currency pair to move down in the short-term.

AUDUSD - Technical Analysis - 5th July 2018

By going short in the AUDUSD pair, we are hoping to benefit from the probable decline. The chart indicates ideal entry and exit levels to be 0.7410 and 0.7220. To mitigate risk, we will place a stop loss order above 0.7510, after the short position is established.

Simultaneously, we may purchase a put option with a portion of our surplus funds. The put option should be valid for a period of one week. We prefer to invest in the option only if the AUDUSD pair trades near 0.7410.

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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