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- AUD/USD showing longer-term bullish signs
- Break above 0.75 would provide more confirmation
- Pair currently at ‘make-or-break’ level of trendline
The Australian Dollar is trading in the 0.7130s after falling over 1.5% overnight, reversing earlier gains, after Philip Lowe, the governor of the Reserve Bank of Australia, downgraded his assessment of the economy in a speech made overnight.
Lowe’s comments suggest a more neutral stance in which the Bank would wait and see how good data coming in from the economy before deciding whether to raise or even cut interest rates.
The shift in tone caught markets by surprise: a mere 24 hours the Aussie Dollar was powering higher on the view the RBA was of a more sanguine setting. The prospect of lower interest rates in Australia will weigh on the currency as it suggests foreign investor capital will be rerouted to jurisdictions that offer higher returns on capital.
"On Tuesday morning the Australian Dollar powered into the lead. Investors interpreted the Reserve Bank of Australia's policy statement to be moderately hawkish, and dismissed the possibility of a rate cut from the RBA. This morning the RBA governor disabused them of that notion, using a speech to point out that rates can go down as well as up. The Aussie fell," says Lee McDarby, Corporate IP Managing Director at Moneycorp.
Where next for the headline AUD/USD exchange rate after the recent news? When the fundamental messaging is apparently frought with contradiction, the use of technical analysis often proves its worth. "One of the main advantage when looking at the markets from the perspective of technical analysis is that a narrative is not required to understand market sentiment," says Piotr Matys at Rabobank.
From a purely technical perspective, the RBA’s volte-face in economic expectations dovetails with the exchange rate reaching a key watershed ‘make-or-break’ level on charts.
The daily chart shows the pair has reached the major trendline and the 200-day MA, which are both key obstacles to further upside and could present a ‘glass ceiling’ to bulls.
Levels like these are known for having an obstacle effect and many short-term traders act in anticipation of this - selling the pair or taking profit on their long positions, and this often increases the downside due to a ‘self-fulfilling prophecy’ effect.
The resolution of this encounter with major resistance will either be a breakout and move higher or a failure and decline back down.
It is not clear which force - bulls or bears - will win out, especially now since the pair has fallen so severely overnight.
The outlook is complicated by the longer-term signs on the monthly charts which are still bullish and suggest the possibility of a breakout higher.
But the pair was looking more unambiguously bullish prior to the sell-off overnight.
For bulls to claim victory the heavy resistance on the weekly chart, from the 50 and 200-week MAs, should be cleared.
This zone of heavy resistance is presented as a box with hatching on the chart above. It is the main obstacle for the new uptrend to overcome.
A break above the 0.7500 level, however, would probably provide sufficient confirmation the pair had successfully broken above it and was on track for more gains, perhaps, even to a preliminary target of 0.7750.
Longer-Term Bullish Signals
Despite volatility on the daily charts, the monthly chart is showing a bullish ‘hammer candlestick’ formed in January, and this could be a sign that the pair has now bottomed after falling in a longer-term downtrend since the previous January highs.
Hammers often punctuate longer-term trends and alert analysts to potential reversals higher.
Further, if this month (February) is also bullish it will enhance the validity of the hammer’s signal and increase the probability it has indicated a reversal in the primary trend.
The monthly chart is also showing another bullish indication with the probable completion of a bearish 5-wave Elliot Wave pattern lower.
An Elliot Wave is a cycle of activity which is composed of 5 constituent waves, three of which are down in line with the dominant bear trend (1,3 and 5) and the other two of which are corrective (2 and 4).
The AUD/USD monthly chart could be interpreted as showing the pair having completed a final 5th wave lower at the recent, January, hammer lows.
Once a 5-wave Elliot down-cycle ends an upcycle of the same scale is expected to follow which in this case suggests the start of a broad uptrend, especially when taken together with January’s hammer candle.
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