AUD/USD trades at the lows close to 0.7030
The Australian Q4 GDP report highlighted some worrying signs for the economy and that is leading to a flood of calls for the RBA to cut rates this year. That has seen AUD/USD fall to a two-month low with sellers eyeing a move towards the 0.7000 handle.
Of note, the daily chart has developed a head-and-shoulders pattern and we're starting to see price start to break towards the downside now. That said, just be wary that there are large expiries rolling off for the pair on 8 March at 0.7000 handle (currently around A$1.3 billion) so that could help to limit the drop in spot price for this week.
However, sentiment in the pair now is all about the RBA and growing calls for the central bank to cut rates. So, what is currently priced in?
Following the Q4 GDP report today, rate cut odds for the October meeting spiked up to 67.6% now after having sat around a 50-50 call since February. What's interesting to note is how expectations have drastically changed since November last year.
At the time, markets were still pricing in a probability of the RBA hiking rates this year. Now, that has completely vanished and it's all about rate cuts instead.
Looking at swap rate pricing, markets have completely ignored any possible chance of the RBA hiking rates and instead have already fully priced in a 25 bps rate cut over the next seven months i.e. by the October meeting.
That will set the expectations as we approach future RBA meetings over the next few months. While the May meeting could be a step too soon for the central bank to cut rates, it could be treated as a stepping stone for it to lay the groundwork for an October cut now.
For AUD/USD, be wary of a run below the 0.7000 handle as it remains a key psychological barrier for the pair. If the head-and-shoulders pattern above plays out, we could be staring at a price movement towards the region of 0.6880-00.
