Strong Nonfarm Payrolls last Friday and a much stronger ISM services index this Monday confirm that the US economy is in much better shape than Europe and other developed peers. We are already seeing the broad DXY dollar index rebounding from a key technical area — which, although currently not fully confirmed — may finally prove the end of this corrective leg.

Below, we look at how we can trade this USD rebound via a short AUDUSD position. The recent resilience in US data, just a week ahead of the Fed meeting, coupled with another dovish RBA meeting this week, looks like a good combination to push AUDUSD lower. Global stock indices (S&P 500, NASDAQ) - another important driving factor for currencies like the Aussie, are also hitting resistance and turning lower so far this week. A potentially bigger move down in stocks should surely add pressure on pairs like AUDUSD.

AUDUSD has already retraced around 61.8% of the August-October decline, which is quite a lot and indicates the pair may be nearing the end of the retracement. The technical resistance in this area and the rejection this week certainly indicate that. A new bearish leg seems to be on the cards here. 

The pair has also reached stretched levels to the upside, as signalled by the Stochastic oscillator (see chart). There is also bearish divergence on the daily Stochastic. 

AUDUSD is now testing some short-term support that is located at 0.6675 - 0.6700. If it breaks lower, it should clear the way for a fall to the 0.65 area or perhaps even lower.

The odds favor a move back toward a more neutral level like 0.6500 ahead of the big market-moving events of the US CPI inflation and Fed meeting next week.

Especially when we consider the current context of an already sharp USD correction down over the past 4-6 weeks, which already seems to have gone a bit too far. The latest, much more resilient than most expected US economic data, should be enough to help reverse some of those USD losses and bring the USD pairs to more “neutral” levels ahead of a volatile next week. This should likely be enough to pull AUDUSD back down toward 0.65 or possibly lower.

Trade Plan:

Entry:

• Look for a short AUDUSD entry nearer to the 0.68 resistance highs if there is an opportunity ;
• or a short entry around current levels would also be appropriate with as top above the highs;

Stop loss:

• Above the most recent swing high around 0.6850 (100 pips above current levels)

Targets:

• 0.65