Yesterday’s surge in risk appetite drew Aussie bulls back and triggered a sharp correction for AUDUSD. 

Price is testing the falling trend line on its 1-hour time frame, which lines up with an area of interest and the 38.2% Fibonacci retracement level.

Stochastic is still pointing up, hinting that further gains are possible. If so, an upside break from the trend line could take place and spark an AUDUSD rally. On the other hand, if the trend line continues to hold as resistance, price could test its recent lows near the .7600 major psychological support.

A higher pullback might last until the .8000 major psychological resistance, which is a key area of interest on longer-term time frames. This could hold as a ceiling for any potential gains, with an upside break likely to signify that the downtrend is over.

The path of least resistance is to the downside since the RBA just cut interest rates earlier this week. The central bank cited a weak growth outlook, a lower inflation forecast, and a potentially higher jobless rate as their reasons for lowering rates. Meanwhile, the FOMC indicated in their statement last week that they are foreseeing more improvements in the US economy and that they are considering tightening monetary policy.

The rebound in commodity prices is also shoring up risk appetite and higher-yielding currencies for the time being, as traders also took the opportunity to book profits off their recent long dollar trades. Event risks for this trade include the NFP release on Friday this week, which might indicate a slower gain in hiring.

Stronger than expected jobs data could renew demand for the US dollar, as this would confirm that the economy is doing well and that it can survive even with higher interest rates later on. On the other hand, a disappointing result could lead to more dollar weakness if traders speculate that this could delay Fed tightening.

By Kate Curtis from Trader’s Way