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Moment of Truth for the Australian Dollar

One of the most interesting currencies in the FX universe is the Australian Dollar (AUD), which fluctuates based on a multitude of internal and external factors. It recently bounced from the 0.55 level against the USD to the current 0.65, an impressive thousand pips bounce.

Before interpreting the chart above, here are a few fundamental things to consider, as to what is fueling the AUDUSD recent rally.

Fundamental Factors Behind AUD Rally

To start with, consider the Chinese market.

Australia is a big exporter to the Chinese economy, especially raw materials. For decades, China has been (and still is) the world’s growth engine. As its economy boomed, the demand for raw materials out of China acted as a bellwether for the world’s growth outlook.

The recent health crisis caused Chinese economic activity to decline, hurting the AUD in the process. By mid-March, China  started to reopen, and the economic activity picked up too. Investors, with their forward-looking attitude, began to load the AUD.

Next, the interest rate differential between the two currencies, the AUD and USD, did not quite favor the Australian Dollar. Up until March, the Fed’s federal funds rate exceeded the cash rate in Australia. As the Fed cut the rate to zero and engaged in quantitative easing, investors found it appealing to start bidding for the AUDUSD again.

Last but not least, the price of gold always drives the AUD market moves. The gold’s rally helped and continues to help in the current AUDUSD recovery.

How About the Technical Picture?

At the recent level, the AUDUSD pair reached dynamic resistance. Such resistance is not horizontal, but, in this case, declining and following the price lower, the more time passes.

Considering the sharp dive in March and the subsequent move higher to dynamic resistance, the pattern looks like an inverse head and shoulders. It makes the current dynamic resistance a possible neckline – a break there is considered bullish.

Projecting the neckline to find dynamic support  offers traders an idea as to where a possible correction might stop. In such a reversal pattern like an inverse head and shoulders, the time taken for the price to consolidate during the shoulders’ formation is key – the more the two shoulders resemble, the stronger the pattern.

On a break higher above the neckline, the logical target points to 0.7 which is where the year started, and we can associate it with the coronavirus pandemic break.