The AUD/USD pair has surged higher this Tuesday after the Reserve Bank of Australia (RBA) provided its strongest hints that it was set to raise rates. This scenario resulted in the bank’s meeting, culminating in the RBA holding rates at 0.1%, with a hawkish statement.
The focus of traders was on how “patient” the bank would continue to be in the face of tighter monetary conditions, rising commodity prices, and higher local inflation. There was no mention of any unwinding of assets purchased as part of the various pandemic-related support programs rolled out to support the economy during the COVID-19 pandemic.
The RBA identified the Russia-Ukraine conflict as a new source of uncertainty in its March meeting statement, specifically identifying rising energy costs due to the conflict as a factor that was likely to produce inflationary effects. The bank had noted then that inflation had picked up “more quickly than the RBA had expected”.
In the latest statement, the RBA noted the continued impact of the Russia-Ukraine war on energy prices, stating that it expected higher petrol prices to push inflation higher. However, the RBA dropped the word “patient” is used in the March statement, saying instead it would now assess additional evidence on inflation and evolving labour costs as the basis for setting its policy. The AUD/USD surged 1.17% following the statement and is up 100 pips as of writing.
From a broad technical perspective, the AUD/USD has emerged from the completed double bottom of 2 December 2021 and 31 January 2022 (with the neckline at 0.73382) with a strong recovery move. The formation and completion of the bullish pennant take the AUD/USD above the projected price completion point of the double bottom, as the pair seeks price discovery at targets above 0.76500.
The intraday spike has completed the bullish pennant on the daily chart and has opened the door for a measured move towards 0.76510. This move is nearing completion as the daily candle is set to test this resistance. A break of this level tests the 0.76973 resistance (21 April, 13 May and 11 June 2021 lows). If the advance continues beyond this level, the 2 June/11 June 2021 highs at 0.77753 become a new upside target.
On the flip side, there is also the possibility of some profit-taking at the next resistance, especially as this spot ends the measured move from the completed bullish pennant. This would prompt a rejection and pullback from 0.76510, with potential downside targets at 0.75782 and 0.75141 in the first instance. Then, a further price deterioration would see 0.74640 and 0.74077 emerge as new short position harvest points to the south.