Is the AUDUSD ready to reverse?

Recent History

The USD has been on a tear in recent months as volatile market conditions have sent the currency rocketing. Inflationary pressures and recession fears have seen investors turn to the USD whilst at the same time taking off risk from the AUD. The AUD’s drop has also been further is largely due to a decrease in the price of commodities such as Iron Ore, Brent Crude, Wheat, and other key resources that rive much of the Australian economy. In addition, the AUD is seen as a risk currency. This means that the currency performs well when the economy is growing and the market is bullish and conversely suffers during times of volatility and slowed growth. There has been some positive price action to indicate that a reversal in the AUDUSD may be imminent.

Technical Analysis

From a long-term perspective, the weekly chart shows that going back since 2015 the AUDUSD has been trading in a relatively stable range between approximately $0.6680 and $0.8126. The one exception to this was the onset of the Covid-19 pandemic which acted as a ‘Black Swan’ type of event towards the pair and the wider market, (A). This caused a mass panic and a subsequent sell off the AUDUSD. Once the initial panic began to subside the pair recovered and was able to recover back into the range. It is interesting to note that over the last few years the pair has reverted to its 50-week moving average, after aggressive moves in either direction. In recent weeks, a reversal does appear to be emerging. The candlesticks also support this by showing a red hammer candle followed by a relatively strong green candle indicating potential exhaustion, (B).

Looking closely at the daily chart can provide a few more targets in terms of potential price targets. The next most reasonable price target could be the 50-day moving average which is also doubles as the next level of resistance at $0.6970. If the price is able to break through this point, then it may go further target the 200 Day average of $0.7190. However, it will likely have to soak up a fair amount of selling pressure.

Ultimately the strength of this pair will largely depend on how accurately the market is pricing in inflation and a recession. If the selloff in equities has maxed out, then it may positively effect the direction of the AUDUSD. However, if there is more pain to come then the pair may sell further down.