Australian Dollar Price Setup: EUR/AUD, GBP/AUD, AUD/JPY

AUSTRALIAN DOLLAR VS US DOLLAR, JAPANESE YEN, EURO, BRITISH POUND – PRICE ACTION SETUPS:

• AUD has rebounded from oversold conditions against its peers.

• EUR/AUD and GBP/AUD faces stiff barriers.

• AUD/JPY remains within its well-established range.

The Australian dollar has rebounded against some of its peers as the Reserve Bank of Australia unexpectedly raised interest the cash rate by 25 basis points at its meeting on Tuesday. Is this a sign that AUD is gearing up for a larger retracement? Probably not yet.

AUD has risen across the board against its G10 peers since Friday ahead of the RBA’s interest rate decision – a possibility highlighted in the previous update. See “Australian Dollar Price Action: AUD/USD, EUR/AUD, AUD/JPY, GBP/AUD”, published April 27.

RBA raised the benchmark rate to 3.85% on Tuesday from 3.6% and kept the door open for more rate hikes to tame price pressures. “Looking forward, some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe,” RBA Governor Philip Lowe said.

Data released last month showed Australia’s CPI rose to 7% on-year in the January-March quarter, Vs 6.9% expected, from 7.8% in the previous quarter. Price pressures eased in March to 6.3% on-year Vs 6.5% expected, down from 6.8% in February, but well above the central bank’s target band of 2%-3%. Markets are now pricing in around roughly an equal chance of another 25-basis points hike by August.

On technical charts, while conditions for a relief in AUD’s slide against it peers are getting in place, on its own, the recent price action isn’t enough to suggest that the worst for AUD is over, especially against EUR and GBP.

EUR/AUD Daily Chart

EUR/AUD – Retreats from a key barrier

EUR/AUD has pulled back from a tough hurdle at the October 2020 high of 1.6825, roughly coinciding with the upper edge of a rising channel from mid-2022. Interestingly, 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 below the threshold of 1.27, very close to the red flag lower threshold of 1.25. (See chart.)

EUR/AUD Daily Chart

To be sure, the retreat in recent days isn’t enough to conclude that the uptrend is over. Indeed, the cross continues to be guided by a rising channel from early 2023. Only a break below converged support at 1.58-1.61, including the 89-day moving average and the lower edge of the Ichimoku cloud on the daily charts, would raise the odds of a larger (downward) correction.

GBP/AUD Daily Chart

GBP/AUD: Overbought conditions as the cross nears a cap

GBP/AUD is showing some signs of exhaustion as it nears a stiff barrier on a horizontal trendline from 2021, at about 1.9150. Market diversity in GBP/AUD appears to be low – hit the lower threshold of 1.25 last week, flashing a red flag. Having said that, the trend remains bullish despite the brief retreat in recent days. Only a break below 1.8100-1.8250 area would raise the risk of a deeper retreat.

GBP/AUD Daily Chart

AUD/JPY: Well within the range

A shooting star candlestick pattern on the daily candlestick charts at solid resistance on the 200-day moving average isn’t an encouraging sign for bulls. Still, AUD/JPY remains well within the well-established range of 86.00-93.00. For the upward momentum to sustain, the cross would need to crack the February high of 93.00.

AUD/USD Daily Chart

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Written by Manish Jaradi, Strategist for DailyFX