Australian dollar technical outlook: AUD/USD rally gains steam

AUD/USD technical forecast - bullish

The Australian dollar's rally against the US dollar is gaining momentum on growing optimism over China’s reopening and rising commodity prices.

AUD/USD has been nicely guided within a rising channel since October. Earlier this month, the pair rose above key resistance on the 200-day moving average, confirming that the short-term trend remains up. This follows a hold last month above key support at the mid-November low of 0.6585 – a key support for cementing the higher-top-higher-bottom pattern, as pointed out in the previous update.

• Price

AUD/USD has retraced 100% of its last leg lower, the August-October 2022 slide, raising the odds that the worst could be over. Momentum on the daily and weekly charts is improving after AUD/USD earlier this month rose above the key 200-day moving average.

• Sentiment

IG Client Sentiment data shows 49% of traders are net-long AUD with the ratio of traders short to long at 1.04 to 1. The number of traders net-long is 27% lower from last week, while the number of traders net-short is 26% higher from last week.

• Narrative

China's reopening is aiding commodity prices, including iron ore. China is Australia's largest export market and iron ore is the country's largest export item. In addition, the reopening is also boosting global growth prospects, helping risk-sensitive AUD given its correlation to global growth.

Notwithstanding Wednesday's hot Australia inflation data, from a relative policy perspective both US Fed and Australia's RBA could slow/pause their rate hikes in coming months.

Where to from here?

From a big-picture perspective, AUD/USD has retraced 100% of its August-October loss – the last ‘supply’ point. In general, when a market can fully retrace the last supply point, it tends to indicate exhaustion in selling pressure or capitulation.

In such instances, the path of least resistance tends to be sideways to up. In this regard, AUD/USD is now testing a significant resistance that would be vital in shaping the medium-term trajectory.

As the weekly chart shows, the pair is now running into a tough resistance area: the 200-week moving average, coinciding with the 89-week moving average and the August high of 0.7135. Any break above the barrier could pave the way toward the April high of 0.7660. Importantly, it would be a building block for medium-term AUD strength.

AUD/USD weekly chart

Having said that, the ceiling around 0.7135 is strong, and a pause/minor retreat can’t be ruled out in the short term, especially given the US Federal Reserve interest rate decision next week. Futures are pricing in a 25bps hike when the Fed policymakers end their two-day meeting on 1 February.

Whether the Fed tones down its hawkishness is key given expectations that the US central bank will back off from its tightening. Any disappointment in this regard could lead to a brief setback in AUD/USD's rally.

AUD/USD daily chart

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