AUDUSD recently broke below a rising trend line support visible on the 4-hour time frame, indicating that a downtrend is starting.

Price found support at the .6825 area and is showing signs of a correction.

Using the Fibonacci retracement tool on the latest swing high and low shows that the 61.8% level lines up with the broken trend line and is near the .7100 major psychological level. If this holds as resistance, AUDUSD could resume its drop to the previous lows or much lower.

Stochastic is already indicating overbought conditions, which suggests that sellers are eager to take control of price action. In this case, any of the nearby Fib levels at .7020 and .7080 might already keep further gains in check. The 38.2% Fib is in line with the 100 SMA and the 61.8% Fib is in line with the 200 SMA.

Event risks for this trade setup include the Australian CPI release, which might show a disappointment for Q4 2015. Another potential catalyst for a big move might be the FOMC statement, as Fed officials might downplay their tightening bias due to the ongoing slowdown in price levels and the global economy.

As in the previous weeks, risk sentiment could continue to play a big role in price action, as the stock market performance in China could still push the Australian dollar around. Another week of risk-off flows could be bearish for the Australian dollar, particularly if the selloff is spurred by Asian equities.

The BOJ statement could also impact overall risk sentiment towards the end of the week, as the previous central bank statements did so. Additional easing from the Japanese central bank could keep risk-taking supported if investors believe that this stimulus would be enough to keep global growth prospects afloat.

By Kate Curtis from Trader’s Way