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Market Insights

Trading insight: RBA drags AUD/USD lower, EUR/USD bleeds and stocks surrender gains

Australian currency image

AUD/USD, EUR/USD, Equities Talking Points:

  • AUD/USD sell-off gains traction after RBA rate decision
  • EUR/USD slumps to 12 - week low, PMI services out of Italy, France and Spain miss expectations
  • Stock indices take strain after another disappointing data print out of China

Monetary policy weighs on AUD/USD after RBA rate decision

As interest rate decisions and monetary policy remain at the forefront of sentiment, the Reserve Bank of Australia (RBA) held its latest rate decision at 04:30 am (GMT), holding rates steady at 4.1%.

Although the RBA has raised rates by 4% since April last year, the reserve bank last raised rates in May, raising expectations that monetary policy tightening may be coming to an end.

RBA cash rate
Source: Reserve Bank of Australia statistics

In response to the decision, bears trading AUD/USD stepped in, driving the pair below prior fibonacci support, turned resistance at 0.644.

With disappointing PMI (Purchases Manager Index) data out of China exacerbating the downward move, the safe-haven USD gained, pushing the US dollar index (DXY) to its highest level since June.

AUD/USD technical analysis

Looking at the daily chart below, the response to monetary policy has played a major role in driving price action since mid-June, when AUD/USD peaked just short of the 0.69 handle.

As the Federal Reserve (Fed) continued on its aggressive rate hiking cycle, prices continued to fall for the remainder of the month, before rebounding off of the 0.66 mark on 29 June.

After a temporary rebound, bulls regained confidence, but once again, fell short of 0.69.

The double top formation that resulted from those two peaks, highlighted the critical level of longer-term resistance. A rejection of this level triggered a sharp sell-off that has seen prices fall by 4% over the last three months.

AUD/USD Daily Chart

AUDUSD daily chart
Chart prepared using TradingView

With the combination of the RBA rate decision, potential strikes and China’s economic woes driving AUD/USD below the 20 - day MA, the pair is currently trading 1.23% lower on the day, with prices swiftly approaching the August low, providing short-term support around the 0.637 handle.

EUR/USD slides to 12-week low, Euro three-year inflation expectations rise

With the European Central Bank (ECB) preparing for the blackout period that begins tomorrow, today will be the last time ECB officials speak before the 14 September rate decision.

While ECB president Christine Lagarde has provided little insight as to when the ECB may ease its monetary tightening policy, inflation expectations out of the Euro Area (08:00 UTC) showed the three-year inflation expectations rise to 4%, with fears of stagflation providing an additional catalyst for price action

EUR/USD Daily Chart

eurusd daily chart
Chart prepared using TradingView

As EUR/USD continues to wrestle with psychological resistance at 1.080, the major currency pair is currently trading at a 12 - week low, with the daily low providing support at 1.0758.

With services PMI data out of Spain, Italy and France missing expectations, the decline in the services sector could reignite fears of stagflation, opening the door for the next layer of support, at the May low of 0.758.

Stocks dip as risk sentiment sours

For Dax, Cac and other European stocks, the return of recession fears has caused risk sentiment to sour, which could spill over to the US session, where US100, SPX500 and US30 will reopen after the long weekend.

With the return of US liquidity, rising volatility could contribute toward the movements in US equities.

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Not investment advice. Past performance does not guarantee or predict future performance.