AUD/USD is testing a key support level at the moment, as the .8950 level is in line with the pair’s lows for the year. Stochastic is pointing up, indicating a potential bounce but fundamental factors are hinting at further losses for the Aussie.

For one, the government’s outlook report revealed that officials are expecting a wider budget deficit for the incoming year. Although credit rating agencies haven’t announced any downgrades yet, many are worried that this might lead to spending cuts and tax hikes, which could be negative for growth.

Besides, RBA Governor Stevens has repeatedly emphasized his desire for AUD/USD to reach the .8500 handle. The FOMC statement is coming up and a decision to taper could push this pair lower.

A good way to play this setup is to setup a straddle, with a buy order above .9000 and a sell order below .8900. Having a wide stop is also recommended since a lot of volatility is expected in the coming days.

By Kate Curtis from Trader’s Way