ASX 200 Tests Range Highs as RBA Rate Hike Odds Collapse

• RBA August hike odds tumble to 28%
• ASX 200 presses against 8811
• Bulls retain the near-term advantage

Rates Tailwind Re-Emerges

One of the more interesting developments in Australian equities over the past month has been the building positive relationship with movements in Australian three-year government bond futures, which are highly sensitive to shifts in expectations for the RBA cash rate outlook.

Source: TradingView

Having been priced at over 80% during periods last month, the probability of a 25 basis point RBA hike in August, seen as the next realistic opportunity with next week's meeting viewed as a placeholder by traders, is now down to just 28%. Earlier this week, it was still priced above 50%.

Source: TradingView

Purely from a valuation perspective, the prospect of the cash rate peaking at a lower level, or having already peaked, may help improve domestic economic sentiment and drive PE expansions. While there's little doubt today's surge has been largely driven by hopes for an actual firm peace deal between the US and Iran, declining hawkish RBA pricing may also be helping at the margin.

The Technical Picture

Source: TradingView

Our ASX 200 contract is testing the recent range highs at 8811 on the H4 timeframe, with the initial probe ending in failure. However, the price continues to sit above the 100 and 200-day moving averages on the daily chart on the right, a zone that it's struggled to hold above in the recent past. As such, given where the contract now trades, we have some levels to build trade setups around.

If the price can push above the current range high of 8811 and hold there, longs could be set targeting 8900, a level that's acted as both support and resistance during periods this year. A stop beneath 8811 would offer protection against reversal. Right now, the message from RSI (14) and MACD on the H4 favours longs over shorts, with upside momentum continuing to build.

However, given the initial reluctance to break the range, and history around these levels, shorts cannot be discounted entirely. Should the price reverse and close beneath the lower end of the moving average zone at 8778.5, shorts could be considered with a stop above the upper end of the zone at 8784.8, targeting 8730 or 8700 initially. 8547 looms as another target, marking the low hit on Thursday prior to the latest bout of Iran-US peace deal hopes.