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AUD/USD Rate Rebound Undermined by Bear Flag Formation

AUD/USD Rate Rebound Undermined by Bear Flag Formation

David Song, Strategist

Australian Dollar Talking Points

AUD/USD continues to retrace the sharp decline from earlier this month as the Federal Reserve insists that the central bank is “not going to run out of ammunition,” but the recent rebound in the exchange rate may end up being short lived as a bear flag takes shape, while the Relative Strength Index (RSI) continues to track the downward trend from earlier this year.

AUD/USD Rate Rebound Undermined by Bear Flag Formation

AUD/USD extends the rebound from the yearly low (0.5506) as recent remarks from Fed Chairman Jerome Powell fuel speculation for additional monetary support, and it seems as though the Federal Open Market Committee (FOMC) will deploy more unconventional tools over the coming days as the central bank prepares a “Main Street Business Lending Program to support lending to eligible small-and-medium sized businesses.”

The Fed’s proactive approach in combating the coronavirus may continue to drag on the US Dollar as the unprecedented response curbs the flight to safety, and efforts by US lawmakers may also help to shore up investor confidence as the Senate passes a $2T fiscal stimulus program.

With that said, the growing number of COVID-19 cases in Australia may put pressure on the Reserve Bank of Australia (RBA) to further support the economy as government officials prepare households and businesses for stage 3 lockdown, and the supply/demand shock may force Governor Philip Lowe and Co. to provide additional monetary support amid the weakening outlook for growth.

In turn, it remains to be seen if the RBA will continue to push monetary policy into uncharted territory, and a further depreciation in the Australian Dollar may force Governor Lowe and Co. to intervene in the currency market as the central bank stands ready to “to support smooth market functioning when liquidity conditions are highly stressed.

Nevertheless, the recent rebound in AUD/USD may encourage the RBA to retain the current policy at the next meeting on May 5, and the exchange rate may stage a larger rebound over the remainder of the month as the Relative Strength Index (RSI) bounce back from oversold territory.

However, a bear flag formation appears to be taking shape, and the bearish momentum may resurface over the coming days as the RSI still tracks the downward trend from earlier this year.

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AUD/USD Rate Daily Chart

Image of AUD/USD rate daily chart

Source: Trading View

  • Keep in mind, the monthly opening range has been a key dynamic for AUD/USD in the fourth quarter of 2019 as the exchange rate carved a major low on October 2, with the high for November occurring during the first full week of the month, while the low for December materialized on the first day of the month.
  • The opening range for 2020 showed a similar scenario as AUD/USD marked the high of the month on January 2, with the exchange rate carving the February high during the first week of the month.
  • However, the opening range for March was less relevant, with the high of the month occurring on the 9th, the same day as the flash crash.
  • With that said, recent price action raises the scope for a near-term rebound in AUD/USD amid the string of failed attempts to close below 0.5710 (161.8% expansion), while the Relative Strength Index (RSI) bounces back from bounces back from oversold territory and displays a textbook buy signal.
  • The rebound from the yearly low (0.5506) has pushed AUD/USD towards the Fibonacci overlap around 0.6080 (100% expansion) to 0.6120 (78.6% retracement), with the next region of interest coming in around 0.6190 (78.6% expansion) to 0.6210 (78.6% expansion) followed by the overlap around 0.6310 (61.8% expansion) to 0.6330 (161.8% 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.