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20.12.2022 03:34 PM
AUD/USD: Breakdown of the 0.6665 key support level
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As follows from the minutes of the December meeting of the Reserve Bank of Australia released today, the bank's leaders considered the possibility of suspending the cycle of monetary tightening due to the uncertainty about inflation and the national labor market.

As you know, at the beginning of the month, the Reserve Bank of Australia raised the interest rate by 0.25%, thus continuing to move in smaller steps than other major world central banks in the fight against high inflation.

"Given both the progress towards full employment and the evidence on prices and wages, some withdrawal of the extraordinary monetary support provided through the pandemic is appropriate," and "the board (of the central bank) will do everything necessary to ensure that inflation in Australia returns to the target level over time."

The Australian dollar reacted very reservedly to the central bank's decision, subsequently continuing to decline.

Although the RBA has signaled that rate hikes will continue in 2023, markets estimate a 50% chance of a pause in the rate hike cycle, especially amid a weakening economy and housing market. The current level of the RBA interest rate is 3.10%, and investors are wondering, as we noted, whether the bank will continue to raise the rate further or take a pause. That said, most economists are inclined to believe that the RBA interest rate will be pushed up to 3.70% next year, but not before August. And this story puts pressure on the AUD and the AUD/USD pair, while the Fed intends to continue raising its interest rate, which is currently at 4.50%, well above the RBA rate.

And although the U.S. dollar is also under pressure today, with its DXY index losing 0.7%, which could be attributed to the dollar's weakening against the yen (after today's BOJ meeting) and the euro, the pairing with the Australian dollar makes the U.S. dollar look preferable.

The Fed will likely have to continue tightening monetary conditions in early 2023, despite growing risks of recession in the USA, and this will support the U.S. dollar in general. Thus, after last week's Fed meeting ended, its leaders said that the fight against high inflation is not over and the tightening of monetary policy should continue.

Thus, the growing divergence in the conditional curves, reflecting the dynamics of interest rates in Australia and the United States, will also indicate growing downward pressure on the AUD/USD pair.

Of the news today, which may again increase volatility in USD and the AUD/USD pair, it is worth paying attention to the publication at 13:30 (GMT) of November data from the U.S. housing market. If, as expected, the number of building permits in November decrease from 1.512 million to 1.485 million, and the construction of new homes from 1.425 million to 1.400 million, then this may put pressure on the USD. However, it is unlikely that it will be of a prolonged nature.

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In general, despite the upward correction since mid-October, the AUD/USD global downward trend prevails. In this regard, you should plan your trading strategy for AUD/USD, giving preference to short positions. The confirmed breakdown of the 0.6665 key support level, which the price has already tested today, will indicate the completion of the upward correction of AUD/USD.

Jurij Tolin,
Analytical expert of InstaForex
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