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AUD/USD Rate Stages Key Test of 200-Day SMA Amid US-China Trade Deal

AUD/USD Rate Stages Key Test of 200-Day SMA Amid US-China Trade Deal

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Australian Dollar Talking Points

AUD/USD extends the advance following the Federal Reserve interest rate decision as the US and China reach a trade deal, but failure to close above the 200-Day SMA (0.6910) may undermine the recent advance in the exchange rate.

AUD/USD Rate Stages Key Test of 200-Day SMA Amid US-China Trade Deal

AUD/USD clears the October high (0.6930) as China, Australia’s largest trading partner, averts the next wave of US tariffs, and easing tensions may keep the exchange rate afloat as it instills an improved outlook for global growth.

The US-China trade deal is likely to keep the Reserve Bank of Australia (RBA) on the sidelines for the foreseeable future, and the central bank may continue to endorse a wait-and-see approach at the next meeting on February 4 as “the Australian economy appears to have reached a gentle turning point.”

At the same time, it seems as though Chairman Jerome Powell and Co. will take a similar approach in 2020 as Fed officials project a more shallow path over the policy horizon.

Image of Federal Reserve interest rate forecast comparison

The Summary of Economic Projections (SEP) shows the federal fund rate staying below 2% in the year ahead, with the dot-plot for 2021 getting more compressed compared to the previous update as “inflation continues to run below our symmetric 2 percent objective.”

The adjustment to the forward guidance suggests the Federal Open Market Committee (FOMC) will continue to move away from its rate easing cycle, and the central bank appears to be in no rush to reverse the three rate cuts from earlier this year Fed officials “believe that the current stance of monetary policy will support sustained growth, a strong labor market, and inflation near our symmetric 2 percent objective.”

In turn, the FOMC may merely attempt to buy time at the next interest rate decision on January 29 as the committee “will be monitoring the effects of our recent policy actions, along with other information bearing on the outlook, as we assess the appropriate path of the target range for the federal funds rate.”

Developments coming out of the US appear to be spurring a shift in AUD/USD behavior as it trades above the 200-Day SMA (0.6910) for the first time since April, but lack of momentum to close above the moving average may undermine the recent advance in the exchange rate as the indicator kept Aussie Dollar capped throughout the year.

With that said, the recent appreciation in AUD/USD may prove to be short lived if the exchange rate marks another failed attempt to close above the 200-Day SMA (0.6910).

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AUD/USD Rate Daily Chart

Image of AUD/USD rate daily chart

Source: Trading View

  • Keep in mind, the AUD/USD rebound following the currency market flash-crash has been capped by the 200-Day SMA (0.6910), with the exchange rate marking another failed attempt to break/close above the moving average in July.
  • A similar scenario may take shape in December if the advance from the monthly low (0.6762) fails to trigger a closing price above the simple moving average.
  • Nevertheless, recent developments in the Relative Strength Index (RSI) offers a bullish signal as the oscillator breaks out of the downward trend carried over from the previous month.
  • In turn, AUD/USD may make a run at the Fibonacci overlap around 0.6950 (61.8% expansion) to 0.6970 (23.6% expansion), but lack of momentum to hold above 0.6910 (38.2% expansion) may spur a move back towards the 0.6830 (23.6% expansion) to 0.6850 (78.6% expansion) region.
  • Need a move below the 0.6780 (38.2% expansion) to 0.6800 (61.8% expansion) region to bring the downside targets back on the radar, with the next area of interest coming in around 0.6720 (78.6% expansion) to 0.6730 (50% expansion).

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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.