AUD/USD, Australian dollar – Price Action:
- AUD/USD retreat since February is a consolidation/correction of the rise since October.
- A potential reverse head & shoulders pattern could be unfolding.
- What are the signposts to watch?
Recommended by Manish Jaradi
How to Trade AUD/USD
By no means a done deal yet, but a bullish reverse head & shoulders pattern brewing makes a case for the Australian dollar to rise toward 0.80 against the US dollar even as the Reserve Bank of Australia (RBA) pauses its rate hiking campaign.
AUD/USD has fallen 7% since February but the retreat isn’t sufficient to conclude that the rebound from 2022 is over for two reasons. The drop to 0.6565 earlier this month marked a 50% retracement of the October-February rise – in general, 38%-50% retracements are considered to be normal, and not necessarily the end of the (prior) trend. Secondly, AUD/USD held a crucial support area of 0.6580-0.6625 (including the November and December lows). A decisive break (two weekly closes below) would have disrupted the higher-top-higher-bottom sequence since the end of last year.
To be fair, the price action is still unfolding, and AUD/USD could decline further, negating the prospective bullish pattern and changing the outlook to bearish. In this regard, the 0.6780-0.6850 resistance area is key – the pair needs to rise above the barrier for the bullishness to resume. Until then the path of least resistance is sideways to down. Any break below this month’s low of 0.6565 could open the way toward 0.6400.
AUD/USD Daily Chart
Chart Created by Manish Jaradi; Source: TradingView
On the other hand, any break above 0.6780-0.6850 would imply that the uptrend from October is intact, initially opening the way toward the February high of 0.7150. A break there would trigger a major head & shoulders pattern (the left shoulder is the July low; the head is the October low; and the right shoulder is this month’s low), exposing upside potential toward the 2021 high of 0.80 in subsequent months.
Australia inflation data released on Wednesday cemented expectations of a pause in interest rate hikes at RBA’s meeting next week, weighing on AUD. The market is pricing a less than 10% chance of a rate hike on April 4. The Australian central bank last month raised its official cash rate to 3.6%, the highest level in more than a decade, with the central bank governor Lowe saying the bank has a “completely open mind” about its April policy meeting and will be guided by key economic data.
AUD/USD Weekly Chart
Chart Created Using TradingView
Aside from the relative monetary policy outlooks (including the US Federal Reserve’s data-dependent approach), Australian macro data has been mixed – a strong February jobs report overshadowed by downbeat retail sales and financial stability concerns.
Still, AUD is likely to benefit from higher commodity/iron ore prices on China’s efforts to revive its property market and accelerated the re-opening of the economy. Moreover, the news of Alibaba’s plans for a major revamp have boosted hopes that China’s regulatory crackdown on corporates could be ending. China accounts for about half of the industrial metal demand and about two-thirds of the world’s iron ore. China is Australia’s biggest export market and iron is Australia’s largest export earner.
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— Written by Manish Jaradi, Strategist for DailyFX.com
— Contact and follow Jaradi on Twitter: @JaradiManish