FX Trading Idea – AUD/USD

Strategy

Buy 0.7100 for 0.7455 with a stop below 0.6965. Time duration is expected to be 2-3 months.

Technical View

Price broke above an Inverse Head and Shoulder chart pattern, which is a reversal pattern, hinting at a potential upside in the coming days. This reversal chart pattern has a price target at 0.7455 in the next 2-3 months. Price has also moved above the 20EMA keeping the uptrend intact. MACD is bullish with both its lines above the zero line, hinting at a bullish price trend ahead. Stochastic is moving higher and has some more room to move before it reaches the overbought zone. Stochastic is hinting price can move higher.

We think the bearish trend that had persisted in the past 4 months had ended in early July and price is likely to move higher in the next 2-3 months ahead to the Inverse Head and Shoulder price target at 0.7455. Only a break of 0.6965 will negate our bullish view.

Fundamental View

Last Wednesday, data showed U.S. inflation was not as hot as anticipated in July, prompting traders to dial back future rate hike expectations by the Federal Reserve. On Thursday, U.S. producers’ prices data offered signs inflation could be moderating, as producer prices unexpectedly fell in July amid a drop in the cost for energy products, while jobless claims rose for a second straight week. These data are hinting that the U.S. Federal Reserve might be less aggressive in its hike cycle. It is likely to weigh down on the U.S. dollar while aiding the US dollar.

On the other hand, the Reserve Bank of Australia had started to hike rate. The Aussie central bank hiked rate again by 50 basis points on 2 August and it’s the fourth monthly rate hike in a row. This is a sign that with a less aggressive hike path by the Fed, the interest rate differential between the two countries could have peaked. This is likely to aid the Australian dollar.

The Aussie dollar had declined from 5 April after reaching a high of 0.7660. The decline to the low of 0.6709 on 12 July had been based on the expectation of an aggressive U.S. Fed rate hike as US inflation climbed to a multi-decade high at 9.1%. We think the interest rate differential between the two countries have peaked and the Aussie is likely to continue its climb higher after a 3-month decline.

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