Australian dollar breaks range but lacks follow through; AUD/USD may reverse

The Australian dollar remains buoyed on Tuesday despite some soft domestic data. Building approvals for April fell 8.1% month-on-month, below estimates of a 2% rise and -1.0% prior.

The data may support the interest rate markets’ view that the RBA will leave rates unchanged at its monetary policy meeting next week.

AUD/USD technical analysis

AUD/USD broke out of the 0.6565 – 0.6818 range that it had been in for 3 months on its way to making a 6-month at 0.6490 last week.

Prior to piercing the lower edge of that range, the Aussie had several attempts to break the topside but failed. These false breaks can be frustrating for traders trying to play the range.

The run lower also saw the price move below the lower bound of the 21-day Simple Moving Average (SMA) based Bollinger Band.

A break like this is sometimes viewed as a volatility breakout and the price action following such a move can provide clues for near-term direction.

If the price remains outside the band, it might suggest that momentum is evolving in that direction, in this case, bearishness.

However, a close back inside the band may indicate that there is a pause in the bear run or a possible reversal. AUD/USD closed back inside the band on Friday and saw modest gains to start this week.

What is clear is that realised volatility has increased as evidenced by the widening of the Bollinger Band.

Looking at the 1-month At-The-Money (ATM) implied volatility options price, the market has barely moved, currently trading a touch over 10%. This may suggest that currency markets are not overly concerned with this dip in the Aussie.

Support could be at the recent low of 0.6490. Further down, support may lie at the prior low of 0.6387 and the nearby Fibonacci level of 0.6381. The latter is the 78.6% Fibonacci Retracement of the move from the low of 0.6170 to the peak of 0.7158.

On the topside, resistance could be at the nearby breakpoints of 0.6565 and 0.6575 or the previous peaks of 0.6675 and 0.6710. Further up, the 0.6780 – 0.6820 area might offer a more significant resistance zone with several prior highs and breakpoints.

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