The AUDUSD Enters Volatile Territory

The AUDUSD reversed early Tuesday in anticipation of the significant Australian inflation data scheduled for Wednesday morning in Australia, in addition to the FOMC rate decision expected out of the US on Wednesday by midday.

The AUDUSD reached its apex in the European trading session at 0.7539, which was a 1 week high for the pair, it subsequently fell during the New York trading session, losing its overall bullish momentum. The slide currently brings the pair progressively closer to the 0.7500 support level but the bearish momentum is still hard felt with the price currently below the 20-hour moving average.

The dollar gained momentum in the market in anticipation of the FOMC’s decision on Wednesday as it shed its losses across the board.

Australia’s quarterly Consumer Price Index (CPI), one of the country’s major inflation indicator, holds a widespread forecast of +0.4% for the second quarter of the year. The actual reading will be extremely important and wields a strong influence towards the market due mostly to the fact that data shown in April for the previous quarter reflected a huge disappointment at -0.2% as opposed to the forecasted +0.3%. This figure enabled persuasion of the Reserve Bank of Australia (RBA) to slash their cash rate in May to the current record low rate of 1.75%, the RBA last week released minutes of its July policy meeting, these minutes have spurred rumours that the RBA could further cut interest rates in August, leading to a major slump for the Australian dollar.

By midday on Wednesday, the US FOMC’s rate decision will be released. Market participants have shown major confidence that the Feds would not raise the interest rates just yet, but the flow of better than expected US economic data over the last several weeks that have bolstered the looming possibility for a rate hike this year. The fact that worries over the impact of the UK referendum on the US economy have slumped with US equities climbing to record highs recently.

The mix of these two risk laden events, the Australian CPI and the US FOMC coming in one day will have volatility for the AUDUSD at its peak. The currency pair which previously fell below the important 0.7500 support and the lower perimeter of a clear outline of a parallel uptrend channel that can be traced back to the May support levels. We witnessed a modest reversal on Tuesday after that breakout to the downside, a lower-than-forecasted CPI reading combined with a hawkish FOMC meeting could drive the AUDUSD falling lower again, with the next major support target pinned at 0.7300 level.

Looking further lower, the 0.7150 support target represents the May lows. A forecasted or higher than forecasted CPI which may help the RBA avoid another rate cut in August, would most likely result in a swift relief rally for the AUD, with a probability of temporarily sending the AUDUSD back up to the 0.7700 resistance level.