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AUD/USD: Potential Dip to 0.6650 Before a Likely Rebound – UOB Group

AUD/USD: Potential Dip to 0.6650 Before a Likely Rebound – UOB Group

The Australian Dollar (AUD) is under pressure, with UOB Group FX strategists Quek Ser Leang and Alvin Liew forecasting a dip to 0.6650 before any significant rebound. The outlook suggests that the AUD may continue to face downward pressure, potentially moving lower to 0.6620 if the bearish momentum persists. Here’s a detailed analysis of the AUD/USD pair’s potential movements in both the short and medium term.

Short-Term Outlook: Immediate Pressure on AUD/USD

The AUD/USD pair has been exhibiting notable volatility in recent sessions. On the previous Friday, the pair briefly rose to 0.6768 but then experienced a sharp decline, closing the day lower by 1.05% at 0.6670. This sharp drop, while substantial, may not be the end of the downward movement. According to UOB Group’s strategists, there is still scope for the AUD to dip further, with 0.6650 being a critical support level in the immediate term.

Key Levels to Watch:

  • Immediate Support: 0.6650
  • Next Support: 0.6620 (unlikely to be threatened in the immediate term)
  • Resistance: 0.6690, followed by a stronger resistance at 0.6715

The strategists emphasize that while the sharp drop on Friday appears to have been overdone, the bearish momentum may still push the AUD lower. The 0.6650 level is seen as a crucial point where a potential rebound could occur. However, the next support level at 0.6620 is not expected to be breached immediately, suggesting that any further decline may be limited in scope, at least in the short term.

AUD/USD Daily Price Chart

Source: TradingView, prepared by Richard Miles

Medium-Term Outlook: Monitoring Key Resistance Levels

Looking ahead to the next 1-3 weeks, UOB Group’s analysis indicates that the downward momentum in the AUD/USD pair has increased, although it remains relatively modest. The sharp decline last Friday, which resulted in the AUD closing at 0.6671, suggests that the pair may continue to face downward pressure, with a possible dip to 0.6620 on the horizon.

Key Levels for the Medium Term:

  • Support: 0.6650 and 0.6620
  • Resistance: 0.6690, with a crucial resistance at 0.6770

The medium-term outlook is heavily dependent on whether the AUD can stay below the ‘strong resistance’ level at 0.6770. If the pair remains below this level, the downward momentum is likely to persist, potentially leading to further declines. However, if the AUD breaches this resistance, the bearish outlook may be invalidated, and the pair could see a reversal towards higher levels.

Factors Influencing AUD/USD Movements

Global Economic Uncertainty

One of the key factors contributing to the current pressure on the AUD/USD pair is the broader global economic uncertainty. The Australian Dollar is often viewed as a proxy for global risk sentiment due to Australia’s significant exposure to commodity exports. When global economic conditions are uncertain or when there is a risk-off sentiment in the markets, the AUD tends to weaken. This has been evident in the recent price action, where concerns over global growth and economic stability have weighed on the currency.

Commodity Prices and Trade Relations

Another critical factor impacting the AUD is the movement in commodity prices, particularly those related to Australia’s key exports, such as iron ore and coal. Any fluctuations in these prices can have a direct impact on the AUD/USD pair. Additionally, Australia’s trade relations, especially with China, play a significant role in determining the currency’s strength. Any negative developments in these areas can further pressure the AUD.

Central Bank Policies

The monetary policies of both the Reserve Bank of Australia (RBA) and the Federal Reserve (Fed) are also crucial in shaping the outlook for the AUD/USD pair. Any indications of policy divergence between the two central banks can lead to significant movements in the pair. For instance, if the Fed adopts a more hawkish stance while the RBA remains dovish, the AUD could weaken further against the USD.

Strategic Implications for Traders

Given the current outlook, traders should approach the AUD/USD pair with caution in the coming days and weeks. The key support levels at 0.6650 and 0.6620 will be crucial in determining the pair’s next move. A breach of these levels could signal further downside potential, while a rebound from these levels could offer a buying opportunity for those looking to capitalize on a potential recovery.

Key Points for Traders:

  • Monitor Support Levels: The 0.6650 and 0.6620 levels are critical. A break below these could indicate a continuation of the bearish trend.
  • Watch Resistance Levels: The 0.6690 level is an immediate resistance, but the more significant resistance lies at 0.6770. A break above this could invalidate the bearish outlook and lead to a reversal.
  • Stay Informed: Keep an eye on global economic developments, commodity prices, and central bank policies, as these will be key drivers of the AUD/USD pair’s movements.

Conclusion

The AUD/USD pair is currently under pressure, with UOB Group’s strategists forecasting a potential dip to 0.6650 before any significant rebound is likely. The downward momentum, while not overly strong, suggests that the pair could move lower to 0.6620 in the medium term if the bearish trend continues. However, the key to this outlook will be whether the AUD can stay below the critical resistance level of 0.6770. Traders should monitor these levels closely and be prepared for potential volatility as global economic conditions and market sentiment evolve.

RichardMiles

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