AUD/USD Forecast: Australian Dollar Set for Breakout Amid US Fed Rate Cut

The Australian dollar shows strong bullish momentum against the US dollar, with technical indicators suggesting a potential breakout at a key resistance level. Recent US Federal Reserve interest rate cuts have weakened the USD, further supporting the upward trend in AUD/USD. The Adam and Eve formation supports the price action and points toward a sustained rally if the AUD can break through the $0.69 resistance. Additionally, the broader economic landscape, including the Reserve Bank of Australia (RBA)’s cautious approach to rate cuts, aligns with the expectation of further gains for the AUD as market conditions favor continuing this bullish movement.

AUD/USD Poised for Breakout at Key Resistance

The Australian dollar shows bullish price momentum against the US dollar, as seen in the daily chart below. The price is approaching a key level and appears poised to break higher. With the US dollar expected to remain weak due to recent rate cuts and the possibility of further reductions, AUD/USD is likely to breach this key level and begin a robust and long-term rally.

This bullish momentum is supported by the strong base formation from August to November 2023, which triggered a sharp upward move following a breakout from the wedge pattern. Subsequently, the price action formed an Adam and Eve pattern on the daily chart, a relatively rare occurrence in technical analysis. Interestingly, Eve preceded Adam and was followed by another Eve, slightly higher than Adam. These fluctuations target the key level, indicating that a breakout could propel the Australian dollar even higher.

The above explanation is further supported by the monthly chart below. The monthly chart highlights the patterns identified in the daily chart, including the Adam and Eve formation. The Adam and Eve patterns appeared in August, where the monthly candle closed above the long-term resistance of the falling wedge. While this monthly close has already paved the way for much higher prices, the September monthly close will require confirmation of a sustained break above this level. Therefore, September must close above $0.69 to initiate the next strong move higher.

This chart was also discussed in a previous article, which analyzed how the Australian dollar performed during significant events such as the global financial crisis in 2008, the Chinese economic slowdown in 2014, and the COVID-19 pandemic in 2020. If AUD/USD breaks above the falling wedge, prices are expected to surge higher, further supported by the bearish outlook for the US dollar.

To further support the above thesis, the weekly chart below shows the price action over the past four years, which has been strongly bullish. The patterns over the past four years indicate that AUD/USD is stabilizing at a key resistance line from the past four years. This resistance is highlighted by the red curve, further reinforcing the idea that AUD/USD is gaining strength as time progresses. Last week’s candle suggests that the price is attempting to break higher. This level is also highlighted in the monthly and daily charts. Additionally, the Adam and Eve pattern supports this bullish outlook.

Impact of US Fed Rate Cuts on Australia’s Economy and Currency

The Federal Reserve has cut interest rates to 50 bps, significantly impacting Australia’s economy. The RBA cash rate target is 4.35%, stronger than the US interest rate. The US rate cuts could increase the value of the Australian dollar against the US dollar, assuming other factors remain constant. A stronger Australian dollar would increase the purchasing power of Australians abroad, potentially benefiting consumers and businesses with import-heavy operations. However, this could adversely affect export competitiveness, as Australian goods and services may become more expensive for foreign buyers.

The pressure on the RBA to follow the US Fed in cutting rates may also increase. Historically, central banks often align policies to maintain economic stability and currency competitiveness. With the Fed lowering its rates, Australia’s relatively higher rates could create market expectations for the RBA to cut its rates. This could be seen as necessary to avoid undesirable currency appreciation and its adverse impacts on exports and trade. However, the RBA has been more cautious in its approach, focusing on balancing inflation control without pushing the economy into a recession.

The chart shows the relationship between Australia’s interest and inflation rates from 1990 to 2024. In Q2 2024, Australia’s inflation rate climbed to 3.8% year-over-year, a slight increase from 3.6% in Q1 2024. The chart shows that when inflation rises, the RBA raises interest rates to cool down economic activity and reduce inflationary pressures. Conversely, interest rates are lowered when inflation decreases to stimulate spending and economic growth.

From the early 1990s, inflation was high, and interest rates were raised to suppress it. As inflation stabilized in the late 1990s and early 2000s, interest rates were lowered. After 2010, inflation and interest rates remained relatively stable, with the RBA adjusting rates to manage moderate inflation. Recently, from 2020 to 2022, inflation surged due to supply chain disruptions and stimulus measures after COVID-19 pandemic, leading the RBA to increase interest rates to combat rising inflation, as seen with the steep increase in both metrics around 2022. Global economic conditions, commodity prices, supply chain disruptions, and demand-side pressures drive inflation fluctuations. Meanwhile, the RBA’s interest rate adjustments reflect efforts to control inflation while promoting stable economic growth.

A rising Australian dollar would have mixed consequences for Australians looking to travel or engage in overseas trade. Travel and imports would become more affordable and benefit consumers. On the other hand, a stronger currency could make Australian exports less competitive in global markets, hurting sectors such as agriculture, mining, and tourism, which rely heavily on international demand. Moreover, businesses with global supply chains could face cost advantages in sourcing goods and services from abroad.

RBA’s Monetary Policy Response and Inflation Control

The RBA has not raised rates as aggressively as the US Fed, but they have prioritized keeping the economy out of recession while managing inflation. Australia’s interest rates have lagged behind the US, with the RBA emphasizing that they have deliberately chosen a slower approach to avoid harming employment. The RBA’s current rate of 4.35% is lower than the Fed’s higher rates, but this divergence could begin to close if the US continues to cut rates. The RBA may find itself compelled to act, but it is unlikely to cut rates this year as it maintains its focus on inflation management.

Moreover, the US Fed rate cuts could relieve Australia’s fight against inflation. The strength of US interest rates has kept the Australian dollar relatively low, which can contribute to inflation through higher import costs. If US rates continue to fall, the Australian exchange rate could rise. This would ease import costs and support RBA’s inflation-fighting efforts.

Conclusion

In conclusion, the Australian dollar shows strong bullish momentum against the US dollar, driven by technical patterns and supported by a weakening US dollar due to Federal Reserve rate cuts. This upward trend challenges the historical resistance levels, indicating the potential for a sustained rally. However, the economic implications of a stronger Australian dollar present a mixed outlook which benefits consumers and businesses reliant on imports while potentially hindering export competitiveness. As the US cuts rates, pressure on the RBA to follow suit may increase. However, the RBA is expected to maintain rates to balance inflation management with the need to avoid economic recession.

From a technical perspective, AUD/USD trades at a key level and shows price strength. A monthly close above $0.69 would break the long-term resistance and potentially trigger a solid upward surge. Investors can continue to buy AUD/USD on dips, as the US dollar remains uncertain, and the Australian dollar is expected to benefit from this uncertainty.