AUD/USD faces fifth week of declines amid hawkish FOMC, and weak inflation data

Last week we saw the AUD/USD lock in a fifth consecutive week of falls to finish at .6512 (-0.94%), as the pullback from late December .6871 high deepened.

The trigger to last week's sell-off was Wednesday's cooler-than-expected Q4 inflation data in Australia. However, telling blows also came for a more hawkish than expected FOMC meeting with the Fed chair all but ruling out the possibility of a rate cut in March, reinforced by a robust non-farm payrolls report on Friday evening.

This week's critical local economic event for the AUD/USD is tomorrow's RBA board meeting, previewed below.

What is expected from the RBA board meeting (Tuesday, February 6th at 2.30 pm)

At its board meeting in December, the Reserve Bank of Australia kept the official cash rate on hold at 4.35%, as widely expected. The RBA retained a tightening bias, using the same wording used in the November statement, watered-down from previous months.

"Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks."

A run of cooler data since the December meeting (including last week's retail sales and Q4 inflation data) confirms the RBA's thirteen rate hikes between May 2022 and 23rd November are having the desired effect, and will see the RBA keep rates on hold tomorrow at 4.35%.

While it's too early for the RBA to perform a dovish pivot, it will likely replace its tightening bias with more balanced forward guidance. We expect the RBA to cut rates by 25 rate cuts in August before a second cut in November, which will see the cash rate end the year at 3.85%.

RBA official cash rate chart

AUD/USD technical analysis

Recently, we have been looking for the AUD/USD to turn the corner and move higher based on the idea that the pullback from the December .6871 high is part of a correction, rather than a reversal lower.

However, today's break below a strong layer of horizontal support at .6520/00, which includes the 61.8% Fibonacci retracement of the October to December rally at .6500c, has cast some doubt over this interpretation.

If the AUD/USD does see a sustained break of .6520/00 after tomorrow's RBA board meeting, it would warn that a deeper decline is unfolding towards 6400c, with the scope to weekly trendline support at .6300c.

However, if the AUD/USD can regain altitude above .6520/00 over the next 24 hours, we will maintain the view that the decline from the December .6871 high has been a correction, and not part of a reversal lower.

AUD/USD daily chart

• _{Source: TradingView. The figures stated are as of 5 February 2024. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}