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This currency pair continued its recent side in early trade on Friday, pressured by dollar strength driven by soaring Treasury yields and increasing bets of further interest rate hikes. The currency’s near-term direction could be tied to trade outcomes from this week’s high-stakes summit in Washington between President Donald Trump and his Chinese counterpart, Xi Jinping. Sentiment for the AUD/USD may also be shaped by positioning ahead of next week’s Reserve Bank of Australia (RBA) meeting where market participants expect the central bank to lift interest rates for the fourth time this year.
Dollar Strength Sets the Near-Term Tone for AUD/USD
Dollar strength has sent the pair tumbling this week, with the Greenback climbing to a two-month high on Thursday as Treasury yields rose and expectations of further Federal Reserve interest rate hikes gathered momentum following hawkish remarks from several of the central bank’s officials and fresh economic data that showed a jump in business activity and increasing pricing pressures. According to the CME Fedwatch tool, markets now price in a 68% chance of a rate hike next month, keeping the Greenback well supported, and subsequently continuing to place downward pressure on the Aussie dollar.
Near-term sentiment for the pair could be shaped by trade outcomes from bilateral talks between U.S. President Donald Trump and Chinese President Xi Jinping during a summit between the two countries currently taking place in Washington. Positive developments from the discussions could boost global risk appetite, placing a tailwind behind the Australian dollar, often seen by traders as a risk-on proxy. Market participants will also like have one eye on next week’s RBA meeting where the central bank is widely tipped to raise domestic interest rates for a fourth time this year to 4.6%.
Fed Expectations and the RBA Meeting Keep Traders Cautious
Earlier this week, the pair staged a decisive breakdown from an ascending triangle, a bearish signal that coincided with the 50 moving average (MA) crossing below the 200 MA to form a death cross—both of which confirm a new downtrend taking shape. Indeed, the AUD/USD continued trending sharply lower throughout Wednesday and Thursday, with yesterday’s hotter-than-expected domestic jobs report unable to offset the Greenback’s surge.
The 0.7000 Area Becomes the Key Support Test
The first immediate support level worth watching sits around the psychological 0.7000 area. Given the relative strength index (RSI) remains deep in oversold territory, traders may look for countertrend bounce opportunities in this location that also aligns with a late July peak and early July trough.
Selling below this level opens the door to a steeper decline toward 0.6930. This area on the chart could attract bargain hunters near the prominent July swing low, especially if the RSI remains below its oversold threshold.
A Rebound Would Need to Clear Resistance Near 0.7065
Countertrend rallies could initially run into overhead resistance around 0.7065. Traders who have opened long positions at lower prices may seek exit points in this region near the bottom of the ascending triangle and a retracement low to the 50 moving average last month.
A convincing close above this level may trigger a move toward 0.7135. This location on the chart finds a confluence of resistance from this week’s “death cross” and a horizontal trendline that also marks the top of the ascending triangle.
AUD/USD Price Chart
U.S.-China Talks Could Still Shift Risk Sentiment
The AUD/USD’s near-term direction will likely continue to be driven by Greenback strength as traders increase bets for further Fed hikes. However, given the technicals flash oversold conditions, the pair may see a countertrend bounce on signs of easing U.S.-China trade tensions ahead of next week’s expected RBA rate hike.
Sources:
https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
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