AUD/USD rallies despite the Fed’s rate hike and hawkish comments. So is it safe to buy the Aussie dollar after the recent rally?
One of the strangest market reactions happened recently in the FX world – the US dollar losses ground against “down under” currencies while gains against the Japanese yen.
The Russia-Ukraine war broke all correlations. It is the only way to explain the divergences in the currency market and why the dollar gains only against some currencies and weakens against others.
In any case, despite the Federal Reserve of the United States raising the funds rate, the AUD/USD pair rallied. In fact, the rally in the discussion here started right during the Fed’s press conference following last week’s hike.
A falling wedge pattern supports the bullish thesis
2022 started with a strong US dollar across the board. The AUD/USD made a new lower low, but it found support at the round 0.7 level.
In doing so, it completed a falling wedge pattern. The subsequent break of the upper edge was bullish, as the break of the 2-4 trendline implies the pattern ended.
Moreover, by retesting it before the Fed’s rate hike, the AUD/USD provided the best contrarian signal to traders willing to take the other side of the market.
Falling wedges are typically retraced minimum 50% and most of the time, a full retracement follows. As such, the bias remains bias and one should not be surprised to see the AUD/USD pair running for a new high above 0.8.
Strong correlation with the US equity markets
One thing is sure – the AUD/USD pair is strongly correlated with the US equity markets. Rate hikes should hurt stocks, but the 0.25% rate hike is out of context because inflation is extremely high in the United States.
For instance, YoY inflation in the United States was 7.9% – the highest in four decades. Yet, the Fed chose to fight it with a 0.25% rate hike.
If inflation data for March shows an annual increase bigger than 0.25%, which is likely, then the Fed’s rate hike will literally be offset.
All in all, the US dollar is weak against the currencies “down under”, and the AUD/USD pair looks bullish. Wouldn’t be ironic for the US dollar to continue to weaken despite the Fed starting a new tightening cycle?