The AUD/USD currency pair shelled out a sizeable chunk of the gains made over the last few trading sessions following news that the US was planning to announce another round of tariffs on Chinese products valued at around $200 billion.
The U.S. and China have been engaged in an unending blow-for-blow trade war this year as the Asian super power continues to respond to Trump administration’s stringent measures on trade relations by taking similar steps on U.S. goods.
Over the last few weeks, trade frictions between the U.S. and China have escalated to include the EU and based on recent reports, it looks like this is not about to end any time soon. Australia relies heavily on exports to Europe and Asia, and especially to China. Therefore, any adverse measures taken by trade partners like the U.S. on Chinese goods have had a negative impact on the Aussie.
The recent pullback, which comes after a significant gain over the last two days is a good example.
The AUD/USD currency pair came close to hitting the psychological key level 0.7500, on Monday and again on Tuesday, but in the late trading hours yesterday shelled much of those gains to trade closer to the 0.7400 level.
The current pullback has created interesting opportunities for the bulls, but the bears will also be optimistic if the current trade war between the U.S. and China continues to boil up. The 4-hourly chart below tries to provide some insights on how traders can approach the pair on a short-term basis as they await major economic news to give a definitive direction.
Looking at the 4-hourly chart above, the bulls can target profits at (R1) and (R2) strategically positioned at around the 0.7450 and 0.7480 levels. And given the current rate of the AUD/USD pair of 0.7420, this implies potential profits of 30-60 pips realizable on a short-term timeframe, potentially this week.
However, should the current pullback continue, the bears will be more interested in the AUD/USD currency pair with three profits opportunities to target at (S1), (S2), and (S3), which are positioned at 0.7375, 0.7345, and 0.7310, respectively. These could result in about 50 pips, 80 pips, and 110 pips of profits, respectively.
And when we extend the timeframe to the daily chart, intermediate trading opportunities emerge while long-term direction becomes even clearer. While the 4-hourly chart suggests that the pair has been trading within a bearish channel for a while, the daily chart indicates that the current movement is a major pullback from a potential double-top trend reversal completed early this year.
This makes the trading pattern perfect for plotting Fibonacci retracements to determine the likely zones for more pullbacks and rebounds. These create interesting trading opportunities for both the bears and the bulls on an intermediate basis.
The daily chart above indicates that the AUD/USD currency pair recently bounced off the key Fib level 61.8% which is strategically positioned at just above the key support level 0.7300 for the pair. This triggered the rebound discussed earlier in this article, and now, it appears to have hit the 50% Fib level positioned at just below the psychological key level 0.7500, again another key reversal zone on a technical perspective. This probably explains why some traders expect the pair to pull back downwards towards the 0.7300 level in the next few trading sessions.
As such, the bears will be targeting profits at (S1) at around 0.7300, which coincides with the 61.8% Fib level. However, should the pair defy the odds, and rally upwards, then the bulls can start to target profits at 50% Fib level positioned at 0.7500 or even at 0.7640 just below (R2), which represents a key rebound zone at 38.2% Fib level.
From a fundamental perspective, traders will be monitoring the ongoing U.S. and China trade wars closely. On the other hand, following last week’s RBA’s positive economic data which buoyed investors in the Australian housing market, progress in the sector and other key economic touchpoints will be tracked closely as more data is released throughout the month.
The greenback also seems to have recovered from the effects of mixed U.S. jobs data released last week while the Job Openings and Labor Turnover survey data this week could also provide the USD with some positivity thereby supporting the bearish outlook on the AUD/USD currency pair.