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Australian dollar outlook ahead of retail sales data

AUD looks for guidance from retail sales due Friday; AUD/USD has turned back within the range and EUR/AUD and GBP/AUD look heavy.

Source: Bloomberg

The Australian dollar has been mixed against its peers as Australian rate hike expectations scaled back after employment unexpectedly fell in April. The key focus is now on retail sales data for April due Friday – forecast to have slowed to 0.1% on-month from 0.4% previously.

Broadly Australian macro data have come in above expectations since early April, according to the Economic Surprise Index. Hence, upbeat retail sales data could help reverse some of the recent dialing back in rate hike expectations, supporting AUD.

The Reserve Bank of Australia unexpectedly raised the benchmark rate by 25 basis points at its meeting earlier this month and kept the door open for further tightening as inflation, which is running at 7%, is only expected to return to the top of the central bank’s 2-3% target by mid-2025.

AUD/USD daily chart

Source: TradingView

AUD/USD: still in a consolidation phase

AUD/USD has pulled back from the mid-April high of 0.6805, pushing the pair back within the well-established range of 0.6550-0.6800, pushing back (but not negated yet) the bullish possibility highlighted in the previous update (see “Australian Dollar Ahead of Budget”, published May 9).

AUD/USD daily chart

Source: TradingView

As the colour-coded candlestick charts based on trending/momentum indicators show, the pair remains in a consolidation phase since early 2023 within the broader bullish phase. The colour-coded chart is an attempt to de-bias, especially in instances where the line is fine between a downtrend and a downward correction within an uptrend.

Importantly, the 14-week Relative Strength Index is holding above the 35-40 level – in the past downward corrections within an uptrend tend to be restricted around these levels (see the weekly chart). However, any break below the cushion on a horizontal trendline from November at about 0.6585 would pose a threat to the broader bullish phase.

On the upside, AUD/USD needs to cross above 0.6805 for the uptrend to resume.

AUD/USD weekly chart

Source: TradingView

EUR/AUD: some more downside?

EUR/AUD has been struggling to hold above the late-April low of 1.6360, raising the risk of a drop toward 1.5950-1.6000 (including the December high and the 89-day moving average). This follows a retreat last month from a tough barrier at the October 2020 high of 1.6825.

EUR/AUD daily chart

Source: TradingView

Also, market diversity, as measured by fractal dimensions, appears to be low as EUR/AUD hit a multi-month high last month. Fractal dimensions measure the distribution of diversity.

When the measure hits the lower bound, typically 1.25-1.30 depending on the market, it indicates extremely low diversity as market participants bet in the same direction, raising the odds of a price reversal.

For EUR/AUD, the 65-day fractal dimension fell to around 1.26, very close to the red flag threshold of 1.25.

EUR/AUD daily chart

Source: TradingView

GBP/AUD: rally fatigue

GBP/AUD’s sharp retreat from a near-stiff ceiling on a horizontal trendline from 2021, at about 1.9150, suggests some fatigue in the rally. While this doesn’t mean the multi-month uptrend is reversing, it probably implies a consolidation/minor retreat before another leg higher.

GBP/AUD daily chart

Source: TradingView

Like EUR/AUD, market diversity in GBP/AUD appears to be low – hit the lower threshold of 1.25 recently, flashing a red flag.

Any break below immediate support at the May 11 low of 1.8575 could pave the way toward the early-April low of 1.8250.

GBP/AUD daily chart

Source: TradingView

*Note: In the above colour-coded chart, blue candles represent a Bullish phase. Red candles represent a Bearish phase. Grey candles serve as Consolidation phases (within a Bullish or a Bearish phase), but sometimes they tend to form at the end of a trend. Note: Candle colors are not predictive – they merely state what the current trend is. Indeed, the candle color can change in the next bar. False patterns can occur around the 200-period moving average, or around a support/resistance and/or in sideways/choppy market. The author does not guarantee the accuracy of the information. Past performance is not indicative of future performance. Users of the information do so at their own risk.

This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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