Aussie Traders May Look to the RBA for a Break of Consolidation

Talking Points:

• AUD/USD sets a new 3-year low following a head and shoulders reversal
• A July low provides resistance
• Mixed RBA language may be confusing traders

Learn how to optimize trades with trend lines with DailyFX Education.

After declining 940 pips over less than 2-months of trading, the AUD/USD has entered a consolidation pattern between two lows seen over the past summer. But traders trying to guess the direction of the break of the range should make sure to keep a close eye on Australian monetary policy.

Between September and November, the Aussie/Dollar formed a head and shoulders reversal pattern, and the pair’s break below the neck line at 0.9272 was followed by a rapid decline of an additional 450 pips. The 450 pip decline reflected the 478 pip distance between the top of the head and shoulders pattern and the neckline, as is usual for the popular pattern.

AUD/USD Daily

Although the Australian Dollar set a 3-year low at the end of the 450 pip reversal, the pair failed to close below the August low at 0.8847, confirming the level as point of support. That level of support was tested two more times before the Aussie pair popped above a downward trend line beginning at the top of the head and shoulders patter.

AUD/USD Daily

Technically inclined traders might have also noticed that a July low at .8998, which was only two pips away from the key 0.9000 level, provided support during the H&S reversal move. Therefore, it should not have been surprising to see AUD/USD find resistance by the broken support by the key level and July low.

AUD/USD Daily

It’s now hard to predict whether or not we are looking at a bearish flag pattern that could continue lower or if this is the beginning of a reversal in the trend.

Furthermore, a look at the fundamentals of the Aussie may leave us even more uncertain. Following the RBA meeting in December, Stevens reiterated that the RBA maintains an open mind on a further cut to its target interest rate, following the 25 bps rate cut in August. However, that dovish outlook was counterbalanced by positive comments about the effects of standing stimulus.

Therefore, the direction of the Aussie may depend on the next statement from the RBA or Governor Stevens. Should Stevens continue to warn of slowing economic growth, the market will further price in an additional rate cut, and the Aussie may fall to new 3-year lows against the US Dollar.

However, if the RBA removes language about further rate cuts from its next meeting or if Stevens displays improved optimism for economic growth, then the Aussie may bounce even higher from this 3-year low.

When looking at the charts, a close above the July low and the key 0.9000 level may indicate further gains to come, while a close below the August low at 0.8847 may be a sign of a further bearish trend for AUD/USD.

New to Forex? Watch this video

Chart created by Benjamin Spier using Marketscope 2.0

-- Written by Benjamin Spier, DailyFX Research. Feedback can be sent to [email protected] .