AUD/USD. Downward Correction and Favorable Longs

[Ben Graham]

The AUD/USD pair updated its yearly price high at 0.6731 on Monday. However, AUD/USD buyers could not maintain this height – at the start of the US session on Monday, sellers seized the initiative. The pair has drifted along the border of the 66 and 67 figures.

Looking ahead, it should be emphasized that the price fluctuations are due to a "thin market." The economic calendar is almost empty on Monday, so these price "jitters" are due to a lack of liquidity.

However, the current situation can be utilized, so to speak, in a practical sense. Within the established upward trend, such significant price pullbacks are highly valuable, as they allow long positions to be opened on more favorable terms.

Although December is not over yet, it can already be said that the AUD/USD pair has been advancing at the fastest pace this year. A nearly 200-pip rise is an impressive result for such a "sluggish" pair as AUD/USD. Here, it is essential to note that the pair's upward momentum has been driven not only by the weakening of the US dollar but also by the strengthening of the Australian dollar. The Reserve Bank of Australia has been a key ally for the Aussie, significantly tightening its rhetoric following the December meeting. Meanwhile, the US Federal Reserve is preparing for further monetary policy easing – the only question is the pace of the rate reductions. The divergence between the RBA and the Fed is the driving force behind AUD/USD growth.

In this context, the Fed's "minutes" will be released on Tuesday, December 30. The minutes from the December meeting could reinforce market dovish sentiment on the Fed's further actions.

I remind you that at the final press conference, Jerome Powell presented softer language than expected. First, he expressed concern about the labor market, citing "significant downside risks." Second, he did not dramatize the situation regarding inflation dynamics. According to him, inflation has slowed, although it remains "somewhat elevated" relative to the central bank's long-term 2% target. At the same time, short-term inflation expectations have decreased compared to the peak values at the beginning of the year.

Following the December Fed meeting, key labor market and inflation data were published in the US. The NFP report reflected a rise in unemployment to 4.6%, a four-year high (the figure has been rising for four consecutive months), as well as weak growth in non-farm payrolls—only 64,000. Meanwhile, the CPI report showed a slowdown in inflation in November. The overall consumer price index in the US dropped to 2.7% YoY (from the previous value of 3.0%), while the core index fell to 2.6% (after a 3% increase in October).

The market will assess the key points from the minutes through the lens of these reports. That is, dovish remarks will have a stronger influence on the greenback than hawkish ones.

A soft tone in the minutes will support AUD/USD buyers: the divergence between the RBA and the Fed will take on new significance.

Indirect support for the Australian dollar may also come from China data, which will be released on Wednesday, December 31. First, we will determine the PMI index for the manufacturing sector. According to forecasts, the figure will remain in the contraction zone in December but rise from 49.2 to 49.4. If the index reaches at least the forecast level (let alone entering the expansion zone), it could indicate the formation of an upward dynamic, as the indicator increased from 49.0 to 49.2 in November.

Secondly, on Wednesday, we will learn the December value of the non-manufacturing PMI index for China. This figure is also expected to remain below the 50-point level (49.8). If both indicators unexpectedly fall into the expansion zone (i.e., exceed the 50.0 mark), risk appetite will increase, allowing AUD/USD buyers to strengthen their positions.

However, as mentioned above, the primary driver for the pair's growth remains the divergence between the Fed and the RBA. Thus, downward corrections are still worth considering for opening long positions.

Technical analysis confirms this. On the D1 timeframe, the AUD/USD pair is situated between the middle and upper lines of the Bollinger Bands indicator and above all lines of the Ichimoku indicator, which has formed a bullish "Parade of Lines" signal. A similar technical pattern has emerged on the weekly chart. All of this indicates a priority for long positions. The first and currently the only target for the upward movement is the 0.6730 mark, which corresponds to the upper line of the Bollinger Bands indicator on the D1 timeframe.

The material has been provided by InstaForex Company - www.instaforex.com