The Australian dollar remains hurt on Tuesday, the day after its biggest one-day drop for more than two months before the expected decrease of the benchmark interest rate by the Reserve Bank of Australia. This supports the US dollar amid the rising the risk appetite for it.
The US Dollar Index, which measures the strength of the greenback against a basket of six major currencies, remains close to its highest value for the week, as investor sentiment rose after an agreement between the US and China to resume talks and made a trade truce. The index moved to multi-day highs near 96.90 during early trade, although it lost some traction soon afterwards. Higher yields and an auspicious print from the ISM manufacturing for the month of May have also added to the change of heart in the sentiment around the greenback on Monday, pushing US Dollar Index back above the critical 200-day SMA in the 96.60 region.
The growth of the US Dollar Index comes amid weak Europe, which continues sinking to its lowest level for more than a week, as the disappointing economic data for the Eurozone has sparked a decline in government bond yields and has increased expectations of interest rates cut by central banks in the currency-union countries.
The ongoing risk-on mood in the global markets in response to the US-China trade truce appears to have trimmed speculations of a potential rate cut by the Fed at this month’s meeting, lending extra legs to USD. This view is also reinforced by recent speeches by Chief Powell and FOMC’s Bullard. The case, however, of lower rates in the near/medium term remains well in place for the time being, while the Fed is expected to keep the data-dependent stance intact and continue to scrutinize the US-China trade situation and uncertainty in global growth.
The focus is now on labor market data for the non-agricultural sectors in the US that are expected on Friday. Economists expect employment to increase by 160,000 jobs in June, compared with 75,000 as the May increase.
The Euro is consolidating above the top if thick daily cloud, which was cracked on today’s attempts to extend Monday’s strong fall (the pair was down 0.65% for the day). The EUR/USD has jumped from below 1.1300 to as high as 1.1321. The world’s most popular currency pair has broken above the 100 Simple Moving Average on the four-hour chart.
Bears are taking a breather before fresh attempts lower as the agreement between the US and China is creating a negative environment for the EUR/USD pair.
The firm breaks lower would expose strong supports at 1.1269 (Fibo 61.8% of 1.1181/1.1412) and 1.1260 (converged 100/30DMA’s), violation of which would risk further weakness.
Meanwhile, rising momentum and oversold stochastic suggest the pair may hold in extended consolidation, before bears resume.
Broken 20SMA (1.1299) caps consolidation, for now, keeping immediate risk at the downside, however, extended upticks cannot be ruled out but should stay below-broken 200DMA (1.1340) to keep bears in play.
The Australian dollar fell slightly to 0.6965 USD after falling by 0.9% on Monday, the largest decline since April 24. Market participants expect the Australian to stabilize after RBA Governor Philip Lowe’s meeting with business later in the day.
During the Asian session, the investor focus turned to the Reserve Bank of Australia (RBA), which lowered the benchmark interest rate by 25 basis points to a record low of 1.00%.
The AUD/USD pair showed a mild reaction on anticipated RBA rate cut by 0.25%, with a rather dovish tone of the statement, as the central bank left the door open for further easing.
Immediate downside risk from Monday’s bearish engulfing is sidelined, with repeated close within thick daily cloud expected to keep bulls alive, as bullish momentum remains strong and offsets, for now, negative signals.
Return and close above psychological 0.70 USD barrier would add to positive signals, however, a sustained break above daily cloud top / 100DMA is needed to confirm bullish continuation.
On the other side, key support at 0.6956 USD is still vulnerable and close below is needed to confirm reversal and open way for the deeper correction of 0.6831/0.7034.