The Australian dollar came under pressure from several fundamental factors of a negative nature. All circumstances including the escalation of tension between the US and China, disappointing data on the growth of Chinese industry, weak wage dynamics in Australia and the overall increase in anti-risk sentiment in the market put strong pressure on the Australian, who paired with the dollar fell below the key support level of 0.7000. Buyers fought long enough for this price outpost. In early May, the price returned more than five times to the area of the 70th figure but recent events have left no chance for the bulls as the pair has consolidated around the 69th figure, which demonstrates a strong downward movement.
However, despite the bearish sentiment on the pair, short positions on AUD/USD pair still look risky, especially now when the price has updated the two-year low (if you do not take into account the impulse decline followed by a rollback December 30 last year). On all higher timeframes, the pair is at its extreme, and only on the monthly chart, there is a "power reserve" up to the 67th figure, where the bottom line of the Bollinger Bands trend indicator is located. In the "modern history" of the pair below the designated level, the price fell only at the height of the 2008 crisis, while over the past 10 years, the Aussie did not stay long below the 70th figure.
For this reason, sales of AUD/USD now need to be treated with extreme caution. It's not 2008, but the fundamental conditions do not favor the development of a full-scale downward trend, especially from current positions. Moreover, we can consider the possibility of opening long positions with an initial target of 0.7000 in the medium term. In this context, much will depend on the results of tomorrow's releases.
But first, it is necessary to deal with the causes of such a protracted downward movement. Firstly, after the interest rate was reduced by the Reserve Bank of New Zealand, the Damocles sword is dominated by the RBA over the AUD/USD pair. Although at its last meeting, the Australian regulator denied the rumors that appeared and even expressed some optimism about the future growth prospects of the national economy. In general, the RBA took a wait-and-see attitude, including the implementation of various options for action, but the regulator did not even mention a reduction in the rate.
In other words, the Central Bank did not focus on a significant slowdown in Australian inflation, leveling investors' concerns about easing monetary policy parameters in the foreseeable future. Nevertheless, the head of the RBA warned that the regulator will closely monitor the dynamics of the main indicators of the economy and if necessary, respond accordingly. This remark has retained the probability of a rate cut this year, so now the Australian macroeconomic reports have acquired special significance for AUD/USD traders.
That is why the market reacted so keenly to today's release of data on the growth of the labor cost index. The indicator characterizing the change in the level of labor costs came out slightly weaker than forecast. On a monthly basis, it remained at 0.5% while experts expected a positive trend of growth to 0.6%. In annual terms, the index remained at the level of the previous month, showing an increase of up to 2.3%. On the one hand, this result is quite acceptable in the absence of stable growth. The indicator keeps at relatively high levels. On the other hand, traders were concerned about the sluggish dynamics of the indicator in anticipation of the publication of key data on the growth of the Australian labor market.
According to general forecasts, the April unemployment rate in Australia will remain at the same level of 5%. The increase in the number of employees should also be released at a decent level: +15 thousand. This is less than in March (+25 thousand), but more than in February (+10.7 thousand). In other words, labor market data should support the Australian dollar but here, it is necessary to carefully look at the structure of indicators. The fact is that at the end of last year and the beginning of the current employment growth was largely (if not completely) due to part-time employment. But by contrast, full employment declined, which then showed a negative trend. This factor adversely affects the dynamics of wage growth since full-time positions offer higher wages. If a similar dynamic takes place in April, then even a low unemployment rate will not save the Aussie from selling pressure. However, in the opposite situation, the Australian will receive substantial support.
In technical terms, the AUD/USD pair is in the framework of the downward movement, as evidenced by the trend indicators on all "older" timeframes (from H4 and higher). The nearest support level is at the base of the 69th figure, namely at the mark of 0.6905 (the bottom line of the Bollinger Bands indicator on the daily chart). The goal of a possible corrective pullback is 0.7000 but if the AUD/USD bulls overcome 0.7030 (the Bollinger Bands average line on the daily chart) and especially 0.7065 (Kijun-Sen line on the same timeframe), then the bearish scenario will lose its relevance.