AUDUSD Jumps Higher on RBA Rate Cut; Will Other Central Banks Follow?

Summary:
• Just as expected, the RBA cut rates by 25 basis points in an effort to support the economy in the midst of the coronavirus outbreak. Will others follow?

Just as expected, the Reserve Bank of Australia (RBA) cut interest rates by 25 basis points to 0.50%. In response, AUDUSD rose by over 50 pips following the announcement to 0.6565.

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According to the RBA, its board made the decision to ease monetary policy in order to assist the economy as it deals with the coronavirus outbreak. Due to disruptions in business and limitation on travel, policymakers feel that the infection has made it difficult for them to gauge their global economic outlook. On the domestic front, they feel that it would weigh down employment as well as dampen inflation. Australia’s education and travel industries have already been hard-hit by the coronavirus outbreak.

Usually, rate cuts are bearish for currencies. This is because easing results to higher money supply which consequently lowers the value of a currency. But why did AUDUSD rise? For one, the move may have already been priced it. It’s worth noting that the currency pair is down close to 600 pips from December 31, 2019. Secondly, this move by the RBA is widely interpreted by market participants as a precedent to other central banks. Investors now expect that other central banks would also announce rate cuts in order to support their domestic and the global economy. There is widespread optimism that such move would significantly offset the effect of the coronavirus outbreak.

AUDUSD Outlook

On the hourly time frame, we can see that AUDUSD has made higher lows following a series of lower lows. Consequently, an inverse head and shoulders pattern has formed. A strong bullish close above 0.6560 would effectively break the neckline resistance. It could signal a potential rally to 0.6750 where AUDUSD topped on February 12.

On the other hand, reversal candles around 0.6560 could mean that there are still sellers in the market. It’s worth noting that this price also coincides with the falling trend line from connecting the highs of February 19 and February 27. If this happens, we could see AUDUSD once again fall to its decade-lows at 0.6430.