Forex Trading Idea  AUD/USD

Sell AUD/USD at 0.7660 with a stop above 0.7850 and price target at 0.7240.

Technical View
Price broke below the neckline of a Head and Shoulder chart pattern, which is a confirmation of a reversal from the bullish price trend to a bearish price trend. Price has currently returned to the neckline and there is also the 20EMA providing resistance as well. While Stochastic is near to the oversold extreme, MACD is bearish and is hinting of a bearish price trend ahead. 20EMA is bearish as well, with a steep slope, which is a sign of a strong bearish price trend. As long as price is capped below the neckline, we see price going to the Head and Shoulder chart pattern’s price target at 0.7240 in the next 3-4 months ahead.

Fundamental View
The U.S. was among the first country in the world to start the coronavirus vaccination and this has help to reduce the numbers of cases in the country. As a result, re-opening of the economy is likely to boost economic growth. This is likely to boost the US dollar against its peers.

The US is also outspending other countries in stimulus spending to help its economy recover from the pandemic. US$1.9t was passed into law and just 2 weeks ago another US$2t of infrastructure initiative was also mooted. More spending will likely to boost economic growth. This is likely to boost the US dollar against its peers.

This large amount of stimulus is also likely to lead to inflation. The US Federal Reserve had predicted inflation to run at 2.4% by the end of 2021, which is above the central bank’s target of 2%. While the Federal Reserve had said it will keep interest rate near to zero until the end of 2023, market is thinking the Fed is too dovish. Market participants are expecting the Federal Reserve to hike rate before the end of 2022. US dollar is expected to strengthen as a result.

This massive amount of stimulus money has to lead to a rise in US bond yields. Bond yield has already risen to a 14-month high of 1.77% and is likely to continue rising, which are likely to support the US dollar.

Australia’s relationship with China has been strained as a result of Huawei and this has led to some sanctions on import of Australia’s products. China remains Australia biggest trading partner. Any sanctions on Australian products are likely to lead to a reduction in Australia’s GDP and a weakening of the Aussie currency.

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