AUD/USD edged up to about 0.7203 in European trading on Friday as the US Dollar stayed soft, with markets reassessing Federal Reserve rate expectations. MUFG pointed to a shift in US rates pricing: the probability of a Fed hike this month is now close to 50:50, down from nearer 70% at the start of the month, following cautious messaging from Fed leadership. US Nonfarm Payrolls for August are due at 12:30 GMT, though the focus in pricing has tilted towards inflation data.
On charts, the pair held above the 20-day EMA at 0.7136, keeping a bullish near-term bias; the RSI was around 66, with support near 0.7200 and resistance towards a four-year high near 0.7280. Separately, John Williams registered a 6/10 FXS Speechtracker score, slightly above the 5.9/10 historical average, while the FXS Fed Sentiment Index fell 1.42 points to 127.44, remaining above the 100 neutral line. Fed communication continued to frame 2% inflation as the priority as policymakers stay data-dependent.
Derivative Strategies In Light Of Fed Reassessment
We suggest derivative traders prepare for increased volatility in the Australian Dollar as the US Dollar faces downward pressure from shifting interest rate expectations. With the probability of a Federal Reserve rate hike this month dropping from 70% to near 50%, the US dollar is losing its yield-driven advantage. This shift makes near-term derivative strategies favoring a stronger Aussie dollar highly compelling.
From a technical standpoint, we see AUD/USD holding strong above its 20-day exponential moving average of 0.7136, with a bullish Relative Strength Index of 66. Traders should consider buying call options or establishing long futures positions targeting the four-year high near 0.7280, while setting tight stop-losses just below the 0.7200 support level. Historically, similar bullish setups with an RSI above 65 have led to an average upward currency continuation of 1.5% over the subsequent fortnight.
Market Events And Positioning Outlook
We believe the upcoming US Consumer Price Index (CPI) release next week will be a much stronger market mover than today’s nonfarm payrolls report. Recent comments from Fed officials suggest that inflation trends are now the primary driver of policy decisions rather than labor market tightness. Consequently, we recommend structuring options strategies, such as straddles, to capture the expected volatility surrounding the CPI release date.
Current CFTC data shows asset managers have recently trimmed their net-long US dollar positions, aligning with this cooling hawkish sentiment. We advise maintaining a flexible approach as the FXS Fed Sentiment Index still remains above the neutral 100 mark at 127.44, indicating that overall policy remains restrictive. Hedging USD-denominated assets with short-term AUD/USD swaps can help mitigate risks if inflation unexpectedly ticks back upward in the coming weeks.
