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Australian Dollar Forecast: AUD/USD Rally Pushes RSI Toward Overbought Zone

Australian Dollar Talking Points

AUD/USD climbs to a fresh yearly high (0.7441) as it extends the series of higher highs and lows from last week, and looming developments in the Relative Strength Index (RSI) may indicate a further advance in the exchange rate if the oscillator pushes into overbought territory for the first time in 2022.

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Australian Dollar Forecast: AUD/USD Rally Pushes RSI Toward Overbought Zone

AUD/USD trades above the 200-Day SMA (0.7320) for the first time since June 2021 and the move above the moving average may indicate a potential change in trend as the rise in precious metal prices appear to be boosting the appeal of the Australian Dollar.

As a result, AUD/USD may continue to retrace the decline from the October high (0.7556) as it clears the opening range for 2022, and it remains to be seen if developments coming out of the US will influence the exchange rate as the Consumer Price Index (CPI) is expected to increase for the sixth consecutive month.

Image of DailyFX Economic Calendar for US

The update to the CPI is anticipated to show the headline reading increasing to 7.9% from 7.5% per annum in January, which would mark the highest reading since 1982, and evidence of persist inflation may generate a bullish reaction in the US Dollar as it puts pressure on the Federal Reserve to adjust its exit strategy.

In turn, the advance from the January low (0.6968) may turn out to be a correction in the broader trend with the Federal Open Market Committee (FOMC) on track to normalize monetary policy ahead the Reserve Bank of Australia (RBA), but the recent flip in retail sentiment looks poised to persist as AUD/USD trades to a fresh yearly high (0.7441).

Image of IG Client Sentiment for AUD/USD rate

The IG Client Sentiment report shows 40.65% of traders are currently net-long AUD/USD, with the ratio of traders short to long standing at 1.46 to 1.

The number of traders net-long is 13.86% higher than yesterday and 12.80% lower from last week, while the number of traders net-short is 2.90% lower than yesterday and 11.07% higher from last week. The decline in net-long position comes as AUD/USD trades to a fresh yearly high (0.7441), while the crowding behavior has eased despite the rise in net-short interest as 37.90% of traders were net-long the pair last week.

With that said, the recent advance in AUD/USD may generate an overbought reading in the Relative Strength Index (RSI) as it clears the opening rage for 2022, but the advance from the January low (0.6968) may turn out to be a correction in the broader trend as Chairman Jerome Powell tells US lawmakers that “it will be appropriate to raise the target range for the federal funds rate at our meeting later this month.”

AUD/USD Rate Daily Chart

Image of AUD/USD rate daily chart

Source: Trading View

  • Keep in mind, AUD/USD cleared the November 2020 low (0.6991) earlier this year after failing to hold above the 50-Day SMA (0.7191), but lack of momentum to test the 0.6940 (78.6% expansion) region has pushed the exchange rate back above the moving average as the Relative Strength Index (RSI) diverged with price.
  • AUD/USD now trades above the 200-Day SMA (0.7320) for the first time since June 2021 as it clears the yearly opening range, with a break/close above the 0.7440 (23.6% expansion) region opening up the 0.7560 (50% expansion) to 0.7570 (78.6% retracement), which lines up with the October high (0.7556).
  • A break above the July 2021 high (0.7599) brings the 0.7640 (38.2% retracement) area on the radar, with the next region of interest coming around 0.7720 (38.2% expansion) to 0.7740 (61.8% expansion).
  • However, a move below the 0.7260 (38.2% expansion) region may push AUD/USD back towards the Fibonacci overlap around 0.7130 (61.8% retracement) to 0.7180 (61.8% retracement), with the next area of interest coming in around 0.7070 (61.8% expansion) to 0.7090 (78.6% retracement).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong