AUDUSD bounced from a mid-October low of 0.6767 yesterday and struggled for direction on Wednesday, with the downside bias still prevails in the daily charts. The pair extends the retreat from the levels around 0.68 and looks set to continue of a downside move, at least in the short term.

On the one hand, aussie is supported by growing hopes for a trade deal between the US and China. Market optimism intensified after Trump hinted that the two countries are close to striking a phase one deal, which helped to further ease concerns over the looming December tariffs deadline. Nevertheless, there is still some uncertainty on this front, mainly due to a lack of details of the potential deal.

Some bullish attempts in the oil market are also playing into AUD’s hands, capping the downside pressure. Brent managed to stage a rebound above the $63 handle overnight despite a fairly bearish API report which showed crude oil inventories in the United States increased 3.6 million barrels last week. Now, the futures need to confirm a breakout in order to preserve the upside momentum in the short term.

On the other hand, AUDUSD is pressured by a generally stronger dollar and a dovish tone by the RBA. By the way, in his recent speech, the central bank governor Philip Lowe hinted at quantitative easing after the latest series of rate cuts. The bank’s head rhetoric suggests that monetary authorities will remain open to further easing, which is negative for the national currency.

The Federal reserve, meanwhile, signaled a pause in policy easing after three cuts since summer and will likely remain on the sidelines in the medium term in order to estimate the outlook for the economy and the effect from the recent easing. In other words, monetary policy divergence now plays against the Australian currency.

Should the US and China fail to strike a partial deal before December 15, risky assets including AUD will suffer dramatically. A negative scenario on this front could fuel a more aggressive breakdown in the AUDUSD pair. Unless there is much more clarity on the deal, the prices will likely remain under pressure. As such, aussie could be posed for a bearish extension to fresh lows below the mentioned level and may slip towards the 0.6750 area in the medium term.


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