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We’ve been discussing this setup in webinars for a couple of weeks now as the U.S. Dollar continues to gyrate with the potential for bullish continuation. At this stage, a weakening Australian Dollar combined with a firm U.S. Dollar provide a backdrop that could make for an interesting reversal setup of AUD/USD’s prior bullish run.

While the U.S. Dollar spent most of the first nine months of the year in the doldrums, AUD/USD climbed from a yearly-open around .7150 all the way up to test above .8100. And this seemingly resolved more than two years of side-ways price action as AUD/USD had spent most of the time from June 2015-June 2017 gyrating between .7000 and .7800.

AUD/USD Monthly: Two Years of Gyration Resolved

AUD/USD Under Pressure as USD Strength Continues

Chart prepared by James Stanley

But life above .8000 wasn’t nearly as kind to the Aussie as life was below, and after sellers engulfed price action in latter-September, prices began a downward descent that hasn’t yet stopped as we’ve seen a recent lower-low combined with what could be a fresh lower-high around the .7900-handle.

AUD/USD Four-Hour: Lower-Lows, Lower-Highs Begin to Show

AUD/USD Under Pressure as USD Strength Continues

Chart prepared by James Stanley

This opens the door for a deeper correction of the prior bullish move in AUD/USD. Stops will be placed above the prior swing-low at .7905, so that if this current area of short-term resistance does not remain as a ‘lower-high’, the trade is exited with the aim of loss mitigation. Meanwhile, targets can be cast towards prior levels of resistance (potentially new support should the move lower continue to develop). The area of .7683 can be used as a first target combined with a break-even stop, with subordinated targets set towards .7609 and then .7517.

AUD/USD Four-Hour: Down-Side Targets for Deeper Development of Bearish Move

AUD/USD Under Pressure as USD Strength Continues

Chart prepared by James Stanley

--- Written by James Stanley, Strategist for DailyFX.com

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