Australian Dollar Outlook: AUD Crunched with US Dollar Back on Top
Australian Dollar Forecast: Neutral
- The Australian Dollar has been whipped around within the range
- The US Dollar has regained traction and might be the driver for the Aussie
- After failing to overcome the topside of the range, will AUD/USD break lower?
The Australian Dollar initially jumped to a new peak last week, but any hopes of higher ground were dashed by the US Dollar reclaiming the ascendency going into the end of the week.
In a somewhat tumultuous few days that saw US and Chinese inflation gauges soften AUD/USD remains hostage to the range that it has been in for several months.
While the easing of price pressures in the US has been cheered by some that are looking for a less hawkish Fed, the retreat of Chinese CPI and PPI might be the harbinger of concerns for global growth in 2023.
The US Dollar found support on perceived haven buying and industrial metals slid lower with less demand anticipated from China.
With lowering expectations for economic activity, some of Australia’s key exports such as aluminium, copper and iron ore have all been under pressure of late. Wheat has also had a run lower.
Despite the anaemic outlook, Australia’s ASX 200 equity index posted a small gain last week. Most global equity indices were also hardly moved. At the same time, currencies have seen a notable uptick in volatility on the back of a surge in US Dollar buying.
It seems that the risk aversion is contained within foreign exchange for now and this may reflect the market’s view that a potential slowdown in earnings will be offset to some degree by a less hawkish Fed.
In this environment, AUD/USD could be vulnerable to fickle sways in sentiment.
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AUD/USD, GOLD, COPPER, IRON ORE, WHEAT, DXY (USD) INDEX
AUD/USD made an 11-week high last Wednesday before collapsing back inside the 0.6565 – 0.6818 range that it has been in since February 24th.
The abrupt U-turn is indicative of a false break that has been prevalent across several asset classes in recent months. This most recent one is the third for AUD/USD in this latest range trade set-up.
A false break is characterised by the price moving outside a range only to then close the session back inside the range, such as what occurred on Wednesday.
The snap lower saw the price move below several daily Simple Moving Averages (SMA) which may suggest that short-term bearish momentum could unfold.
A move toward the lower end of the range might see the Double Bottom levels of 0.6565 and 0.6590 tested. Below there, support might be at the breakpoint near 0.6550.
In this current range trading environment, all the false breaks have occurred on the topside. This may indicate that speculative short positions could be vulnerable on a squeeze higher.
The aforementioned price action might see the 0.6780 – 0.8620 area become a potential resistance zone. False breaks may still be a feature for AUD/USD going forward.
--- Written by Daniel McCarthy, Strategist for DailyFX.com
Please contact Daniel via @DanMcCarthyFX on Twitter
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.