The AUD/USD experienced a significant drop at the end of last week, breaking critical breakout structures along the way. The main reason for this drop was the outstanding results in the US jobs sector, which took the market by surprise. The United States added 517,000 jobs in January, which was well above the average analyst estimate of 187,000. This robust increase showed that the US economy continues to thrive despite rising interest rates.
The US jobs data arrived at a time when markets were positioning for a Fed pivot. A more hawkish stance could now come back into play in terms of sentiment, even after the Federal Reserve raised interest rates by just 25 basis points on Wednesday, the smallest hike since it began tightening rates to slow inflation.
The Aussie, on the other hand, was boosted by the re-opening of the Chinese economy and the surprising strength of Australia’s December inflation release. The release of the inflation data firmly put the risk of another 25 basis points rate hike from the Reserve Bank of Australia (RBA) on the table for February 7. Analysts at TD Securities said that “Accelerating services inflation locks in a 25bps hike” and “We forecast a follow-up 25bps hike in March taking the terminal to 3.6%.”
What the Future Holds
Markets will be looking for the statement from the RBA to open the door to pausing the rate hikes. This could lead to a bullish correction, testing the neckline of the M-pattern with 0.70 as the target. However, it’s important to note that the momentum is currently to the downside and we could see a continuation of the initial balance for the week, with a decline of around 50 pips to 0.6880 from Friday’s close of 0.6929.
If this plays out as predicted, taking 0.6870 as a floor, the 38.2% Fibonacci retracement on the daily chart comes in at around 0.6980. This means that investors should keep an eye on this key level, as a break above it could signal a potential reversal of the current downtrend.
In conclusion, the AUD/USD market has been experiencing a significant sell-off, breaking through critical breakout structures and closing below the 78.6% target area. The root cause of this is the outstanding results in the US jobs sector, which came as a surprise to the market and was backed up by strong Services data. The US economy continues to thrive, despite the recent interest rate hike, and this has put a more hawkish stance back in play in terms of sentiment. On the other hand, the Aussie had been boosted by the re-opening of the Chinese economy and strong inflation data, which had put the possibility of another rate hike by the RBA on the table.
Despite this, the market will be looking for a statement that opens the door to pausing, which could lead to a bullish correction and a test of the neckline of the M-pattern with 0.70 as the target. However, the momentum is currently to the downside and the price could continue to drop in the official open in Sydney. If this scenario plays out, taking 0.6870 as a floor, the 38.2% Fibo retracement on the daily chart comes in at around 0.6980.
In conclusion, the AUD/USD market is currently facing a lot of uncertainty, with both bullish and bearish scenarios possible. It’s essential to keep a close eye on the latest developments and market sentiment to make informed trading decisions. Whether you’re a seasoned trader or just starting out, having a comprehensive understanding of the market and the factors that influence it is crucial for success in the foreign exchange market.