Bullish AUD/USD Behavior to Persist as RSI Pushes Into Overbought Zone

Bullish AUD/USD Behavior to Persist as RSI Pushes Into Overbought Zone

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Australian Dollar Talking Points

There appears to be a shift in AUD/USD behavior as it closes above the 200-Day SMA (0.6900) for the first time since 2018, and recent developments in the Relative Strength Index (RSI) foreshadow a further appreciation in the exchange rate as the oscillator pushes into overbought territory.

Bullish AUD/USD Behavior to Persist as RSI Pushes Into Overbought Zone

AUD/USD approaches the July high (0.7082) as the US and China, Australia’s largest trading partner, pledge to sign the Phase One trade deal over the coming days.

According to China’s Ministry of Foreign Affairs, the “US side is willing to maintain close communication with the Chinese side and strive for the signing and implementation of the agreement at an early date,” with White House trade advisor Peter Navarro insisting that the agreement could be signed “next week or so.”

The US-China trade deal may keep the Reserve Bank of Australia (RBA) on the sidelines as it alleviates concerns of a global recession, and the central bank may change its tune in 2020 as “the Australian economy appears to have reached a gentle turning point.

Image of RBA interest rate decisions

In turn, Governor Philip Lowe and Co. may highlight an improved outlook at the next meeting on February 4, but it remains to be seen if the RBA will continue to endorse a dovish forward guidance especially as the International Monetary Fund (IMF) warns that “unconventional monetary policy measures such as quantitative easing may become necessary.”

With that said, the ongoing shift in US trade policy is likely to keep the RBA on its toes as President Donald Trump tweets that the administration “will begin negotiations on the Phase Two Deal immediately, rather than waiting until after the 2020 election, but the Australian Dollar may face headwinds over the coming months as the central bank retains its pledge “to ease monetary policy further if needed.”

Nevertheless, there appears to be a shift in AUD/USD behavior as it closes above the 200-Day SMA (0.6900) for the first time since 2018, and the bullish momentum may gather pace over the coming days as the Relative Strength Index (RSI) pushes into overbought territory.

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AUD/USD Rate Daily Chart

Image of AUD/USD rate daily chart

Source: Trading View

  • AUD/USD has been capped by the 200-Day SMA (0.6900) for most of 2019, but the recent break/close above the moving average signals a potential shift in market behavior especially as the Relative Strength Index (RSI) pushes into overbought territory for the first time since 2018.
  • The fresh series of higher highs and lows keeps the topside targets on the radar for AUD/USD, with a break/close above 0.7020 (50% expansion) raising the scope for a run at the July high (0.7082).
  • The July high (0.7082) largely lines up with the Fibonacci overlap around 0.7090 (38.2% retracement) to 0.7110 (78.6% expansion), with the next area of interest coming in around 0.7180 (61.8% retracement).

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.

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