Australian Dollar Bearish Outlook

Australian Dollar Bearish Outlook

The Australian dollar is having a hard time against the US dollar as the last years have seen the pair moving aggressively lower from values above parity to as low as below 0.70.

The reason for this move was mostly caused by the central bank (Reserve Bank of Australia) cutting the rates and a slowdown in China.

What happens in China is extremely important to the Australian economy as more than thirty percent of its goods are going to China. Therefore, if the Chinese economy is catching a cold, Australia is sneezing and the AUD moves lower.

The RBA cut rates in order to adjust to this new reality and now they are seating at 1.5% after being as high as over 3%.

Next week the central bank is meeting again and while it is not expected to cut rates again, the statement should be closely watched for further hints it will do that in the future.

From a fundamental point of view, the AUDUSD pair is doomed to move lower still as the two central banks, the RBA and Federal Reserve in the United States are moving in different directions, or on diverging paths when it comes to monetary policy.

While RBA is still in an easing cycle and hints to do more, the Fed is talking about hiking rates again this year and this might be the beginning of a tightening cycle. This cannot end well for the Aussie pair so more downside should be expected.

The technical analysis points towards a lower AUDUSD as well, no matter what the time frame is used.

On the bigger picture, the AUDUSD is in a major bearish trend that started with a bearish triangle breaking lower from just above parity.

This consolidation in the last months represents just a simple a-b-c in terms of Elliott waves theory, most likely being a flat pattern that by the time it is completed it should allow the bearish trend mentioned earlier to resume.

Moreover, a close look at the 4h chart or the daily one shows a rising wedge forming and everyone knows this pattern is bearish.

However, the big question is if the pattern is completed. Because the time frame is quite big, it could very well drag on for a few more weeks or months, without being invalidated.

The trigger for it to break lower should come from a fundamental event caused by the two central banks mentioned above. If either the RBA cuts rates again or Fed will hike sooner and faster than the market expects, a new leg lower should follow in the AUDUSD pair.

As for the target do the downside, things should be taken step by step, with 0.7150 being the first level that needs to be broken.

This will confirm both the rising wedge is completed as well as the a-b-c finished as well. Considering the fact that now the pair is trading in the mid 0.75 area, there are some pips until that target, but it should come sooner rather than later.

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