AUDUSD Breaks Out of Descending Trend Line

24 May 2022

After a downtrend that spanned from April into May, the AUDUSD marked the lowest level since June 2020 by dipping to 0.6828 on 12 May 2022. While there could be many factors at play in the currency pair’s movement, there seems to be a significant correlation between the pair and the US Dollar Index (DXY). The DXY that gauges the strength of the US dollar against a basket of rival currencies, peaked at 105 on 13 May before retracing to current levels slightly above 102. In tandem with the weakening USD, the AUDUSD bounced to hover above 0.7100.

Improved risk sentiment weighs on the US Dollar

As a safe haven currency, the US Dollar readily reacts to market risk sentiments. Among the drivers that buoyed the risk sentiments were reports that US President Joe Biden said that he will be reviewing tariffs imposed on imports from China amid growing voices from businesses to remove the levies. At the press conference in Tokyo on Monday, Joe Biden said that he is considering removing some of the tariffs and would talk with Treasury Secretary Janet Yellen about it, citing “We did not impose any of those tariffs – they were imposed by the last administration.”

Moreover, the lowering number of Covid-19 cases in Shanghai have sparked optimism with regards to the easing of strict lockdowns, sending hopes for economy recovery.

The US dollar suffered as a result of improved market risk appetite. Aside from that, the performance of the Australian Dollar also correlates with the economic status of its largest trade partner, China. Any positive news on China’s front would benefit the Aussie.

Hawkish Reserve Bank of Australia

The release of RBA’s monetary policy meeting minutes last week may have provided some tailwinds to the Australian Dollar as the minutes highlighted that policymakers were debating for more aggressive monetary policy to fight the rising inflation. Soaring fuel prices, strong domestic demand and tight labour market were among the factors that sent Australia’s inflation to a 20-year high in March. A hawkish central bank typically provides strength to its currency.

Technical Analysis

After breaking above a descending trend line resistance on 23 May, AUDUSD staged a minor pullback on 24 May in an attempt to establish the former resistance as support. Technical indicators showed a bearish bias on the daily chart, as the Relative Strength Index (RSI) resides below the neutral zone of 50, while the Moving Average Convergence Divergence (MACD) is in the negative region. Despite this, the indicators are showing hints of a bullish reversal with a bullish divergence on RSI. The MACD histogram inching higher above the signal line also suggest a waning bearish momentum.

AUDUSD is consolidating between the 23.6% and 38.2% Fibonacci levels, which will serve as immediate support and resistance levels respectively. A successful retest and rebound from S1 (0.7024) would validate the bullish breakout and upside targets would be set at R1 (0.7145) and R2 (0.7267) by extension.

Tuesday, May 24

USD – S&P Global Composite PMI(May), S&P Global Manufacturing PMI(May), S&P Global Services PMI(May), New Home Sales (MoM)(Apr)

Wednesday, May 25

USD – Fed’s Chair Powell speech, Durable Goods Orders(Apr), Durable Goods Orders ex Defense(Apr), Durable Goods Orders ex Transportation(Apr), Nondefense Capital Goods Orders ex Aircraft(Apr),

AUD – RBA’s Ellis speech

Thursday, May 26

USD – FOMC Minutes, Core Personal Consumption Expenditures (QoQ)(Q1), Gross Domestic Product Annualized(Q1), Gross Domestic Product Price Index(Q1), Initial Jobless Claims(May 20), Initial Jobless Claims 4-week average(May 20), Personal Consumption Expenditures Prices (QoQ)(Q1), Pending Home Sales (MoM)(Apr)

Friday, May 27

AUD – Retail Sales s.a. (MoM)(Apr)

USD – Core Personal Consumption Expenditures – Price Index (MoM)(Apr), Core Personal Consumption Expenditures – Price Index (YoY)(Apr), Personal Income (MoM)(Apr), Personal Spending(Apr), Michigan Consumer Sentiment Index(May)

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