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AUD/USD Rate on Track to Negate Head-and-Shoulders Formation

AUD/USD Rate on Track to Negate Head-and-Shoulders Formation

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Australian Dollar Talking Points

AUD/USD appears to be on track to negate the head-and-shoulders formation from earlier this year as it clears the opening range for April, and the decline from the February high (0.8007) may end up being a correction in the broader trend rather than a change in behavior amid the failed attempt to close below the neckline.

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AUD/USD Rate on Track to Negate Head-and-Shoulders Formation

AUD/USD trades to a fresh monthly high (0.7785) despite the bearish reaction to Australia’s Employment report, with the exchange rate coming up against the March high (0.7849) as it climbs back above the 50-Day SMA (0.7721).

Image of DailyFX economic calendar for Australia

Looking ahead, it remains to be seen if the minutes from the Reserve Bank of Australia’s (RBA) April meeting will influence AUD/USD as the central bank pursues its second round of government bond purchases totaling A$100B, but more of the same from Governor Philip Lowe and Co. may produce headwinds for the Australian Dollar as “the Bank is prepared to undertake further bond purchases if doing so would assist with progress towards the goals of full employment and inflation.”

It seems as though the RBA is in no rush to scale back its emergency measures as “the Board is committed to maintaining highly supportive monetary conditions until its goals are achieved,” and the RBA Minutes may derail the recent advance in AUD/USD if the central bank shows a greater willingness to further utilize its balance sheet.

However, the RBA may start to lay out an exit strategy as “the recovery is expected to continue, with above-trend growth this year and next,” and a less dovish forward guidance may help to negate the head-and-shoulders formation from earlier this year as AUD/USD appears to be on track to the March high (0.7849).

Meanwhile, the recent flip in retail sentiment has largely dissipated like the activity seen in 2020, with the IG Client Sentiment report showing 43.33% of traders currently net-long AUD/USD as the ratio of traders short to long stands at 1.31 to 1.

Image of IG Client Sentiment for AUD/USD rate

The number of traders net-long is unchanged from yesterday and 17.72% lower from last week, while the number of traders net-short is also unchanged from yesterday and 8.33% higher from last week. The decline in net-long interest comes as AUD/USD trades to a fresh monthly high (0.7785), with the culmination of the rise in net-short interest bringing back the crowding behavior seen in 2020 as 53.03% of traders were net-long the pair during the previous week.

With that said, AUD/USD appears to be on track to negate the head-and-shoulders formation from earlier this year as it approaches the March high (0.7849), and the decline from the February high (0.8007) may end up being a correction in the broader trend rather than a change in behavior amid the failed attempt to close below the neckline.

With that said, AUD/USD may continue to track the monthly opening range ahead of Australia’s Employment report amid the string of failed attempts to close below the neckline,but the decline from the February high (0.8007) may end up being a correction in the broader trend rather than a change in behavior as the RSI breaks out of a downward trend to show the bearish momentum abating.

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AUD/USD Rate Daily Chart

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Source: Trading View

  • A head-and-shoulders formation has taken shape as AUD/USD trades to a fresh yearly low (0.7532) in April, but need a close below the neckline around 0.7560 (50% expansion) to 0.7570 (78.6% retracement) to open up the downside targets.
  • A measured move of the key reversal pattern brings the 0.7440 (23.6% expansion) to 0.7500 (50% retracement) zone within reach, with the next region of interest coming in around 0.7370 (38.2% expansion) to 0.7380 (61.8% retracement) followed by 0.7180 (61.8% retracement) to 0.7210 (78.6% retracement) area.
  • However, lack of momentum to close below the neckline may keep AUD/USD within the opening range for April as it attempts to push back above the Fibonacci overlap around 0.7620 (38.2% retracement) to 0.7640 (38.2% retracement),with the next hurdle coming in around 0.7720 (38.2% expansion) to 0.7760 (23.6% expansion), which largely lines up with the 50-Day SMA (0.7713).
  • The Relative Strength Index (RSI) highlight similar dynamic as the oscillator reverses course ahead of oversold territory to break out of the downward trend from earlier this year.
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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.

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