The AUD/USD exchange rate and the ASX 200 Index will be in the spotlight this week as the Reserve Bank of Australia (RBA) delivers its interest rate decision on Tuesday.
The Australian dollar has been in a slow uptrend recently, and is now hovering near its highest point since November 6 last year. Similarly, the blue-chip ASX 200 Index has jumped to $8,600, a few points below the year-to-date high of $8,641.
RBA interest rate decision
The main catalyst for the AUD/USD and the ASX 200 Index will be the upcoming RBA interest rate decision. Economists polled by Reuters expect that the bank will deliver the third interest rate cut of the cycle in this meeting.
If this happens, the bank will bring interest rates to 3.60% from 3.85%. Rates started the year at 4.35%.
The RBA, like the Bank of England (BoE) and the Federal Reserve, have been more cautious during the current cycle. This is unlike the European Central Bank (ECB), which has adopted a more aggressive tone, having delivered nine rate cuts.
A rate cut by the RBA will likely be bullish for the ASX 200 Index because it will make bonds more attractive. Data shows that the ten-year yield has dropped to 4.20%, down from the year-to-date high of 4.720%.
The RBA decision comes on the same week that Donald Trump’s trade war deadline ends. This deadline will likely have a minimal impact on Australia and the ASX 200 Index.
For one, it is likely that US tariffs on goods sent to the United States will remain at 10%. Additionally, Australia is a relatively small exporter to the US, with exports accounting for approximately 5% of its total exports.
Most notably, Trump has already reached a trade deal with China, Australia’s biggest trading partner.
The other key catalyst for the ASX 200 and the AUD/USD pair will be the upcoming Federal Reserve minutes on Wednesday. These minutes often impact international assets because of the impact of US interest rates.
AUD/USD technical analysis
The daily chart shows that the AUD/USD exchange rate has been in a bull run in the past few months as the US dollar index crashed. It moved from a low of 0.5900 in April to a high of 0.6588.
The pair has moved above the 61.8% Fibonacci Retracement level. Most importantly, it has formed a golden cross pattern as the 50-day and 200-day Exponential Moving Averages (EMA) have crossed each other.
Therefore, the pair will likely continue rising as bulls target the next key resistance level at 0.6720, the 78.20% retracement level.
ASX 200 Index analysis
Australian stocks have been in a strong uptrend in the past few months, moving from a low of $7,146 in April to the current $8,600. It has reached a crucial level, as it failed to move above it twice in February and June.
The index has also formed a golden cross pattern, while the Relative Strength Index (RSI) and the MACD indicators have all pointed upwards. Therefore, it will likely have a strong bullish breakout, with the next target being at $9,000.
However, there is a likelihood that the index will retreat as investors book profits after it hit a crucial resistance level.
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