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AUD USD breaks down eyes lower lows

Article By: ,  Financial Analyst
November 13, 2017 12:53 PM

AUD/USD tentatively broke down on Monday below a key chart pattern, indicating a potential continuation of the downtrend that has been in place since early September. This tentative breakdown occurs ahead of key inflation data from the U.S. in the form of the Producer Price Index on Tuesday and the Consumer Price Index on Wednesday, as well as critical employment data from Australia on Thursday.

Last week, the Reserve Bank of Australia kept interest rates unchanged, as widely expected, and did not depart significantly from its generally dovish monetary policy stance. The latest economic data out of Australia has been relatively soft, including both disappointing retail sales numbers as well as unexpectedly low inflation readings. The RBA has recently continued to harbor concerns over weak inflation, low wage growth, and the relative strength of the Australian dollar, which have combined to preclude the central bank from raising the cash rate from its current record low. For Thursday’s employment data, Australia is expected to have added 18.9K jobs in October, and its unemployment rate is expected to have remained steady at 5.5%.

Meanwhile, the US dollar has generally continued to be supported by high expectations for rising US interest rates in December and into 2018 under the helm of newly-nominated Fed Chair Jerome Powell, as well as anticipation of impending US tax and other fiscal reform. While there have recently been concerns over the timing and content of US tax reform plans, the US dollar has thus far remained supported within a relatively tight trading range.

Going forward, the divergence between the current monetary policy stances of the hawkish-leaning Fed and dovish-leaning RBA is likely to continue weighing on the AUD/USD currency pair. Since early September, when AUD/USD hit a long-term high above 0.8100, the currency pair has been in a sharp decline as the US dollar has climbed in recovery mode and the Australian dollar has been pressured in part by an increasingly dovish RBA. Most recently, AUD/USD has been trading in a bearish inverted pennant pattern after having broken down below key support around 0.7750 in late October. Having tentatively broken down below that pattern on Monday, AUD/USD is potentially poised to extend its downside correction. With any further pressure on the currency pair, the next major downside target is around the key 0.7500-area support level.

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