AUDUSD has previously made a strong break below support at the .8100 major psychological level and dipped below .7900 at the start of this trading week. 

Price appears to be making a pullback to the area of interest, which lines up with the 50% Fibonacci retracement level and might hold as resistance.

Stochastic is still heading north, which means that Aussie bulls are in control of price action for now. Buying momentum could take price up to the broken support zone and perhaps until the 61.8% Fibonacci retracement level near .8125. This could be the line in the sand for any short-term rallies, as an upside break could mean that a reversal is taking place.

Earlier today, Australia reported a 0.2% quarterly CPI figure, slightly lower than the estimated 0.3% reading and the previous 0.5% uptick. Components of the report indicated that the drop in oil prices was mostly responsible for the weak inflation reading, along with lower commodity price levels.

This leaves the upcoming FOMC statement as the main event risk for this retracement setup, as the Fed is likely to drop more hints on their monetary policy bias. In the minutes of their previous meeting, the Fed indicated that they are unlikely to hike interest rates before April this year but acknowledged the strength in the domestic economy.

The Fed is widely expected to retain this same cautious tone in this week’s announcement, possibly citing the risks of low inflation while assuring that the economy is still on track to recovery. Market watchers are waiting to see if the Fed will drop the “considerable time” phrase in discussing how long interest rates might stay low after easing has ended while reiterating that they “can be patient” in considering policy normalization.

By Kate Curtis from Trader’s Way