AUD/USD extended higher in early Asian trading on the back of broad-based weakness in the greenback. The pair briefly traded at fresh four-month highs prior to retreating as the dollar recovered.
Similar to price action late last week, the Australian currency has shown strength as it was last seen trading higher by about 0.40% against the greenback, despite a reversal in the trade-weighted dollar index (DXY) to take it back to positive territory for the day.
The dollar index had dipped below support at 100.18 in the Asian session but was lifted higher from the European open, slightly ahead of psychological support at the 100.00 handle. The index was last seen trading at 100.38 for a gain of 0.07%.
AUD/USD is threatening a declining trendline that connects highs from April with highs posted in November. The trendline had triggered a turn lower in late February, resulting in a decline to the 0.7500 handle, and is important for the medium-term directional bias of the currency pair.
Intraday fluctuations above the trendline will be less important but a sustained break above the November high of 0.7778 would be a clear indication of an upside break.
The pair pushed above the February high today, albeit a marginal and brief break. On a daily chart, the pair is seen trading at trendline resistance which emphasizes Monday’s daily close.
Last week’s Fed meeting elicited a large drop in the value of the greenback and as a result this week’s Fed member speeches will be important in the event the central bank decides to adjust market expectations.
Fed member Evan’s was the first to speak and displayed some optimism by introducing the potential of a fourth rate hike in 2017. The Federal Reserve had forecasted three rate increases this year at their meeting in December but markets have shown reluctance in pricing in a third hike this year.
The uncertainty for US monetary policy this year lies with the Trump administration. Equity markets have been boosted by expectations of fiscal stimulus but the Fed has retained a cautious stance. The central bank wants further details regarding the stimulatory measures and remains unchanged in its stance. If economic progress were to continue as the central bank expects, the impact of fiscal policy on the economy could warrant a fourth increase.
While the prospects of a fourth increase remain in the far distance, Evan’s, who is known to be dovish, displayed confidence by firmly stating expectations for two more rate hikes this year.
The Fed’s tightening schedule may limit gains in the AUD/USD pair while a neutral stance from the Australian central bank has boosted the Australian currency.
The Reserve Bank of Australia moved to a neutral stance following their last cut in August and does not appear concerned, in contrast to central bank’s banks from other major commodity currencies which have taken a more cautious stance. The RBA has also remained optimistic over some recently reported weaker data, opting to remain focused on the bigger picture.
Further clarity as to the RBA stance will tend to impact AUD/USD after the central bank releases minutes from their latest meeting at 20:30 EST today.
A horizontal level at 0.7721 marks the highest weekly close in 2016 for the pair and will be pivotal for price action during the central bank meeting.