AUD/USD X-Rate Retreats from the Great Barrier at 0.75

The US Dollar is seen strengthening through mid-week trade following a period of underperformance.

The Dollar has been on the backfoot for much of January, allowing AUD/USD to rally 5.0% since the start of the year.

The exchange rate has however now reached a significant resistance level at 0.75 where it is likely to find further progress difficult.

The million Dollar question for the pair is whether it can break above 0.7500 into new territory above, or whether it will be pushed back down again.

‘Resistance’ on a price chart describes a level where price is likely to stall and possibly even correct back or reverse completely.

One of the levels at 0.7500 is from several old highs and lows, according to Richard Perry, market analyst at FX Broker Hantec:

“There is key resistance around the $0.7500 area which is now being tested which is an old pivot from the key October low, and the November/December highs,” says Perry.

“The market has been stuttering for the past few days around this $0.7500 resistance area but is looking to have another go higher this morning,” he adds.

Commerzbank’s Karen Jones, who is overall bearish the pair, but like Perry is also surprised by Tuesday’s strength.

“AUD/USD charted an inside day on Friday but today looks capable of re-challenging the 0.7523 mid-December high.

“Currently the market will have to go sub 0.7380 to alleviate immediate upside pressure…”

Out of Momentum

The steep rise in January is a sign of enduring strength.

Rarely do such strong starts suddenly end with a reversal.

But it has taken its toll on momentum which is showing signs of peaking, and this may indicate a temporary cessation of buying is on the horizon.

During such a period the pair may consolidate or pull-back in a shallow correction before eventually moving higher again.

This is our base case for the pair, which we see pulling back into a range between 0.7420 and 0.7530.

Eventually, the strong move up suggests a continuation higher and break out from the topside of the range.

A breakout would be confirmed by a break above 0.7560 with an upside target at 0.7550 just short of the R2 monthly pivot.

Perry notes that the RSI has rarely gone above 60-65 and is now at 66.

This suggests momentum may be peaking, which in turn could mean upside will be limited.

“It will be interesting to see whether the bulls can sustain the charge as every rally in the past six months has floundered between 60/65 on the RSI. The RSI has today moved to 66, whilst the Stochastics have been threatening to roll over,” remarks Hantec’s analyst.

Elliot Analysis of RSI

Elliot Wave analysis isn’t just applicable to asset prices and rates but any phenomena so can even be overlaid on indicators.

For example, our own chart of AUD/USD below shows RSI looking toppy after making 5 Elliot waves higher, which is a complete Elliot Wave cycle.

This indicates momentum will probably start to correct back, and the exchange rate will either fall as well or go sideways.

Swissquote’s Box Pattern

Swissquote’s technical analysis highlights how the exchange rate has been moving in a broad sideways range, or box pattern, since March 2016.

The current move started at the range lows and if it is part of a continuation of this sideways move looks likely to eventually move up to the range highs at 0.7835.

Ahead: Aussie Employment Data, Fed's Yellen Speaks

A busy calendar of the US and Australia could provide a fundamental jolt to the AUD/USD.

Mid-week sees the first of two speeches by Federal Reserve Chair Yellen.

"The Fed narrative on portfolio reinvestment has lately shifted toward a slightly more hawkish tone, so watch for any new insights from Yellen," says Elsa Lignos at RBC Capital Markets.

Datawise, hHeadline CPI should get another boost from firming gas prices (consensus forecast headline & core 2.1%y/y).

It will be the first time that headline CPI is north of 2% since mid-2014 and we expect it to hit 2.5% in both Jan and Feb given easing year-ago comps in energy.

"It is dangerous to draw too many conclusions from a single inflation number, but given the stall in the ‘Trumpflation’ trade and the technical pressure on USD, it needs a strong number to avoid a further washout of USD longs," says Lignos.

Then on Thursday we receive Australian employment data and disappointments here could undermine the currency in light of the recent shock GDP release that showed the economy contracted in the third quarter of 2016.

Analysts are forecasting employment to rise 10K, down on the previous month's 39.1K.

"Details will remain important given that they have tended to suggest an underlying rate of labour utilisation that is lower than the headline numbers suggest. With growth likely to remain below potential through 2017, modest slack is likely to persist for some time yet," says Elsa Lignos at RBC Capital Markets.