The Aussie dollar is eyeing a breakout toward 0.7115 as USD weakness triggers a bear trap. Here are the key technical levels to watch.
The Aussie dollar (AUD/USD) trades near its highest level since mid-June on Friday, recovering from an early-week sell-off following the dollar coming under significant pressure after the U.S. Federal Reserve kept rates steady and reports surfaced of Japanese authorities intervening to shore up the country’s embattled currency.
How Fed Policy and Yen Moves Are Shaping AUD/USD Sentiment
The AUD/USD recovery started Wednesday after the Federal Reserve kept its benchmark interest rate range unchanged and the accompanying statement lacked any hawkish guidance, leading traders to question the central bank’s intention about tackling lingering inflation. The pair continued to gain ground throughout Thursday on further dollar weakness as speculation grew among analysts that Japanese authorities had intervened to support the country’s currency, the yen, which has recently traded near four-decade lows. Government or central bank currency intervention can happen when an exchange rate moves quickly in one direction over a short period of time.
Earlier in the week the Aussie dollar languished at its lowest level since mid-July after traders were spooked by hawkish remarks from Reserve Bank of Australia (RBA) Governor Michele Bullock and soft domestic quarterly CPI data scaled back bets on further interest rate hikes.
The initial move lower started Tuesday after Bullock told a Sydney function that the central bank was “prepared to act as required” to contain inflation, while the pair’s selling continued into Wednesday morning after the closely watched trimmed mean inflation rate rose 3.6% annually, below expectations of 3.7%, and quarterly core inflation increased 0.8%, also below consensus forecasts.
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What Recent AUD/USD Price Behavior on the 1‑Hour Chart Suggests
After breaking down below an established trading range after Wednesday’s softer-than-expected inflation data, the AUD/USDstaged a sharp reversal driven by dollar weakness to confirm a bear trap, a trading event that traps market participants who initiated short positions and subsequently generates losses as the price turns higher. More recently, the pair has consolidated within a pennant above key support, suggesting a continuation of Thursday’s impulsive move higher.
Why The AUD/USD Setup Points To A Watchful Move Toward 0.7115
If the pair continues to gain ground, traders can use TradingView’s bars pattern tool to project a bullish price target. To do this, we take the price bars comprising the pair’s impulsive move immediately prior to the pennant pattern and overlay them from the anticipated breakout point. This forecasts a target of about 0.7115, around 85 pips above the pair’s current trading levels.
Key AUD/USD Levels That Highlight Risk During Pullbacks
If the AUD/USD breaks down below the pennant pattern, traders will likely keep a close eye on how the price responds to the 0.7020 level. This area could provide support near the three prominent peaks that formed on the chart between July 15 and July 23.
Selling below this crucial support level could see the pair retest a lower trading zone around 0.6990. Traders may see this as a high probability area to open long positions near a horizontal trendline that connects a series of corresponding price action on the chart stretching back to the July 14 high.
A move lower from this area would set the stage for a decline toward 0.6960. This region on the chart would likely attract attention near the July 19 and July 23 swing lows, which also closely align with price action earlier this week.
What Could Challenge Or Support This Week’s AUD/USD Gains
I think the AUD/USD sits well placed to retain Thursday’s gains and potentially stage a continuation move higher providing the dollar remains under pressure from possible intervention in the Japanese yen and risk appetite continues to get a boost from positive corporate earnings and the potential for a breakthrough in peace negotiations between the United States and Iran.
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