Earlier this week, we wrote a piece on the AUD/USD highlighting the potential for a pullback after China's industrial production growth eased more than expected (click HERE for details). With China being Australia’s largest trading partner, the disappointing data did in fact cause the Aussie dollar to ease in the first half of the week. But things changed dramatically on Wednesday as the US dollar slumped after the FOMC appeared to be more dovish than expected, which helped to push expectations about the next Federal Reserve rate increase further out. On top of this, fresh data out of Australia overnight showed the unemployment rate there surprisingly fell to 5.8 from 6.0 per cent previously, although the slight rise in employment disappointed.
Nevertheless, the AUD/USD extended its gains in overnight trading after posting a bullish engulfing candle on Wednesday. As a result, it has broken above the key resistance range between 0.7535 and 0.7600, where it had stalled on Monday. Previously this area was a major support zone; now that we are above it once again, this could be a very bullish outcome. More so after given the fact that the AUD/USD’ prolonged period of consolidation appears to have ended when it formed a false break reversal pattern at the prior support level of 0.6905 in January. Since then, the Aussie has made a series of higher highs and higher lows. Consequently, the 50-day moving average is turning higher and the 200 is flattening. Watch out for a “golden crossover,” soon.
So, although the RSI appears to suggest the AUD/USD may be overbought, this could actually be a “good” overbought condition since it shows that the trend is indeed strengthening. If the bulls hold their ground here, the next stop for the Aussie could be at the 161.8% Fibonacci extension level of the most recent downswing at 0.7730 (not drawn on the chart) or even at the psychological level of 0.8000.
BUT I can’t stress the importance of this 0.7535-0.7600 range and the need for the bulls to hold their ground here. A failure to do so would be deemed a very bearish outcome. In this potential scenario, the AUD/USD could drop to re-test the old resistance at 0.7380, before potentially bouncing back.