With the Reserve Bank of Australia holding fast on interest rate policy in its latest decision, the stage is set for a dip in the local dollar as US and Australian monetary policy gradually converge.While the guidance for Australia stresses a number of different risk factors that could drag on the outlook, the risk factors for the US are largely skewed to the upside.As such, after a minor technical correction higher in the AUDUSD pair for the better part of the last year following a multi-year downward trend could be set for a rapid reversal.

A strong emphasis on fiscal stimulus combined with climbing inflation and falling unemployment could beckon quicker tightening of US interest rates, helping catalyze a US dollar rally.By comparison, expectations are for additional easing of Australian interest rates in 2017, especially if the rebound in commodity prices over the last year subsides.With rates projected to move in opposing directions, a retest of support at 0.7130 might be inescapable as AUDUSD faces renewed downward pressure.

Australian Guidance Weakens

In an attempt to weather the ongoing global trade storm, Australia has been very proactive in reducing interest rates in an effort to spur growth in areas of the economy unrelated to commodity extraction and exports.While the moves have helped to tackle joblessness, bringing the measure down to the lowest rate since 2013, the Reserve Bank of Australia has highlighted underutilization as job creation focuses predominantly on part-time employment.The other purpose of lower rates has been fighting disinflation.

Consumer prices growth in Australia has fallen significantly over the last year, mirroring developments across many advanced economies.Australia has been especially hard hit by disinflation because of the high level of exposure to natural resource prices.With the RBA targeting between 2.00% to 3.00% inflation, the latest annualized figure of 1.30% remains well below the Central Bank’s goal.As such there is a substantial probability of the RBA undertaking additional accommodation to help raise the measure and promote growth within the economy.

Slowing Growth to Weigh on AUD

In his latest comments, RBA Governor Philip Lowe highlighted slowing growth in the economy.Third quarter gross domestic product figures due on Wednesday are likely to confirm this sentiment, with economists forecasting quarterly GDP will contract -0.10% versus 0.50% recorded during the second quarter.This viewpoint is corroborated by policymakers who have stressed expectations that the economy to remain sluggish heading into the end of the year before picking up in 2017.

Although US growth measures are also projected to slow during the 4th quarter, the one unknown remains the impact of President-elect Donald Trump and his ambitious stimulus plans.Remarks from New York Federal Reserve President Bill Dudley seem to confirm the notion that the proposed fiscal measures could force the Central Bank to tighten US interest rates quicker than previously anticipated.With a rate hike nearly assured during next week’s meeting, any indication that rates are set to continue rising throughout 2017 will contrast sharply with projections of additional RBA accommodation.Taken in tandem, these developments have the potential to drive AUD/USD well below recent multi-year lows.

Technically Speaking

The AUD/USD pair has been steadily trending lower since hitting record highs in 2011 on the back of the natural resource boom in the nation.However, since investment and commodity prices have gradually ebbed, the Australian dollar has been steady falling versus the US dollar.From 2012 onwards, the pair has been trending lower in a bearish equidistant channel formation.Ideally, trades should focus on establishing bearish positions near the upper channel line targeting the lower channel line. With AUD/USD just shy of the upper channel line, it might be viewed as an ideal opportunity to initiate a position targeting 0.6790 on a longer-term basis.

On a shorter-term basis, if the pair should be able to experience a candlestick close above the upper channel line and resistance at 0.7735, it could signify an upside breakout. Standing in the way of any rally are the 50-day and 200-day moving averages trending above the price action, acting as resistance. Furthermore, should the 50-DMA cross the 200-DMA to the downside, it could be viewed as a very bearish development, sending prices towards a retest of support at 0.7130.Any break of this level would confirm an end to the medium-term uptrend and a resumption of the prevailing longer-term downward trend.

Looking Ahead

The GDP figures that are due during the Wednesday overnight session could definitely have an impact on the Australian dollar near-term, however, the warnings about tapering growth ahead from the RBA should give bulls pause. Besides the upcoming Australian data, the key determinant of more medium-term AUD/USD price momentum will be the upcoming US interest rate decision and guidance from the Federal Reserve.

More hawkish guidance could send AUD/USD back towards 0.7130 whereas no mention of the outlook for the gradual pace of tightening could see the pair trend sideways until one of the two central banks takes further action on policy. In the meantime, while the risk factors are skewed to the downside, there is the distinct possibility that AUD/USD will be moving horizontally absent relevant economic developments.