The AUD/USD currency pair pulled back on Wednesday evening to trade at around the 0.7250 level following a statement from the US Federal Reserve. The FOMC held the funds rate steady at 2.25% as expected and this was followed by a spike in the US Dollar Index (DXY), which gained 0.66% to 96.63 points.
This gain helped the greenback to recover some lost ground against the Aussie, which had pushed the pair to test the 0.7300 level following this week’s Midterm Election results that divided the two houses of the US Congress. The Democrats won the majority in Parliament while the Republicans retained the Senate majority.
The Democrats’ win was viewed by investors as a potential drawback to President Trump’s plans for more tax cuts, which coupled by a stronger economic growth have helped the USD to strengthen its position in a basket of six rival currencies.
The AUD/USD currency pair has been trading within a downward trending channel over the last four months. However, this week it breached the upper limit of the channel and marched towards the 0.7300 level before pulling back on Thursday evening following the FOMC statement.
Based on the 4-hourly chart below, the latest move in the exchange rate of the pair has created some interesting trading opportunities for both the bulls and the bears. The bears will be more optimistic with their trades given the shift in momentum late on Thursday and they could target profits at 0.7200 level denoted by (S1) in the chart below for a potential payoff of about 50 pips.
Bigger profit margins can also be achieved by targeting 0.7150 denoted by (S2) above, which would yield a payoff of about 100 pips.
On the other hand, the bulls will be looking for an unlikely rebound, but in this case, they might have to wait until the pair hits (S1). After that, they can target profits at the main resistance level above, located at the 0.7300 key level, which would result in profits of about 100 pips.
Opportunities at (R1) and (R2) provide better profit margins but by the look of things they now appear to require a long-term view.
And talking of long-term, the general trend of the pair can better be demonstrated using the daily chart. As illustrated on the daily chart below, the current downward trending channel appears to have formed at the early stages of the year 2018.
By using Alan Andrews pitchfork to analyze the possibility for breakouts and the strength of the current trend, it clearly shows that the bears still hold the upper hand despite the recent break above the median line.
The pair seems to have spent most of the time below the median line since April, which suggests that the recent bullish breakout above it might be only temporary. Nonetheless, should the upward movement continue in the coming weeks, then the bulls can begin to target profits at around 0.7367 level denoted by (R1) in the daily chart above, which also happens to coincide with the +50% level above the median line.
In the long-term, the bulls could also target (R2) located at around 0.7450, which levels with previous highs last witnessed in July 2018.
However, as noted, the momentum now appears to be with the bears and following Thursday’s pullback, a retest of the median line could be on the cards. This would imply a short-term bearish target of 0.7200 denoted by (S1) in the daily chart. (S2) at around 0.7100 also presents an interesting intermediate trading target while (S3) is a long-term target, which would test multi-year lows last witnessed at the start of 2016.
The greenback could be checked back in the early hours of Friday morning as the Reserve Bank of Australia issues its latest Monetary Policy Statement. Home Loans and Investment Lending for Loans numbers will also be announced. On the other hand, the greenback could later reclaim the throne with Fed’s Quarles Speech expected at 1.15 pm GMT, while the monthly and yearly figures for Producer Price Index excluding Food and Energy will be announced 15 minutes later.
Overall, from a fundamental perspective, it looks like the greenback has a lot in store to boost its position against the Aussie, which could pull the AUD/USD currency pair further down.