- A combination of factors causes some selling around the AUDUSD on Wednesday.
- Rising US bond yields and a softer risk tone help revive demand for the dollar.
- Not-so-aggressive comments from RBA Lieutenant Governor Bullock weigh on the Aussie.
AUDUSD is under some selling pressure on Wednesday and extends the overnight retracement from 0.6550 or its highest level since Sep 23rd. The pair falls to the 0.6470 area during the first half of the European session and, for now, seems to have snapped a three-day winning streak amid a modest dollar rally.
In fact, the dollar index is making a nice rebound from the seven-week low hit the previous day and is being supported by a combination of factors. Despite lowering bets on more aggressive Fed policy tightening, markets continue to price in at least a 50 basis point rate hike in December. This remains supportive of elevated US Treasury yields and helps revive demand for dollars. This, coupled with a further decline in equity markets, provides additional support to the safe-haven dollar and helps draw flows away from the risk-sensitive Aussie.
Also, not-so-aggressive comments from Reserve Bank of Australia (RBA) Deputy Governor Michele Bullock weigh on the national currency. Speaking of the economic outlook, Bullock noted that there are good reasons to think that we are approaching the peak of inflation this cycle. This suggests that the RBA could continue to slow down the pace of its rate hike cycle and puts some pressure on the Australian dollar. The combination of the above fundamental factors supports the prospects for a further intraday depreciation move for the AUDUSD pair.
From a technical point of view, the pair is at a critical juncture. AUDUSD price has reached a long-term downtrend line dating back to the August highs and has been following prices lower ever since. Furthermore, it has reached a key resistance level at the highs of Oct 4 and Oct 28. This could also be the neckline of an inverse head and shoulders (H&S) pattern, although confirmation is yet to come. A break above the trendline and neckline, confirmed by a close and open above them at 0.6510, would lead to a strong rally, with targets at 0.6640, 0.6740 and eventually even 0.6870 if the objectives suggested by the pattern are met as expected. Conversely, a pullback below the aforementioned resistance confluences would raise questions about a breakout to the upside. Furthermore, a move lower and a break below 0.6330 would negate the potential of the inverse H&S pattern and likely lead to a sell-off.
In the absence of any major economic releases from the US, traders will be guided by speeches from New York Fed President John Williams and Richmond Fed President Thomas Barkin on Wednesday. This, coupled with US bond yields and general market risk sentiment, could influence dollar price dynamics and provide some momentum to the AUDUSD pair. However, attention will continue to be focused on the latest US consumer inflation figures due out on Thursday.
Technical levels to watch
Source: Fx Street
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