The Australian dollar (AUD) is in anticipation of the annual correction! What to expect?!

Toward the end of the year, reversal formations begin to form on the market, which is caused by multiple factors, such as correction, mood swings and cessation of actions, for some factors causing a particular movement. Also, these movements that is formed from the end of one year to the beginning of another may become very significant signals  in the future that will determine the entire movement of a pair or currency over a long period of time.

One of these movements can be traced on the AUD/USD currency pair, which may indicate a reversal of the pair in the future.

Background

Previously, the AUD/USD pair throughout 2018 remained in a steady downtrend, according to the results of which the currency pair fell by 1,100 points (January’s 2018 high at the level of 0.8100,  October’s 2018 low at the level of 0.7000).

The reason for this decline was the political risks associated with the United States and China trade confrontation, since the Australian dollar is very much exposed to risks around the Chinese yuan, which is associated with close trade relations between China and Australia. As a result, the trade war between the United States and China, first of all, affected the currencies of the Asia-Pacific region and the Australian dollar itself.

From a technical point of view, the AUD/USD pair was also subject to correction pressure after strengthening in 2016 and 2017.

Fig. 1. AUD/USD pair (W1) chart

 

So, from the chart above it can be seen that this pair was moving in a steady uptrend, which was limited by the boundaries of the trading range. The actual correction of 2018 turned out to be more significant due to the trade opposition. As a result, the couple felt for significant support in the area of ​​0.7000-0.7500.

What to expect

Amid weakening of the United States and China trade confrontation we can expect at least a slowdown in the decline of the AUD/USD pair. This pair may receive support based on information that the United States and China are ready to return to the negotiating table. And it is despite the fact that it is not necessary that they agree. The main thing is that trade relations do not deteriorate further, and it will be enough to restore the Australian dollar to reduce risks and increase optimism.

Technically, the downtrend of 2018 remains very narrow, which may indicate both a trend reversal and its expansion. Therefore, until the key resistance of 0.7300 is broken, it will be early to talk about reversal and correction. Also, do not forget about the tight monetary policy of the US Federal Reserve, which will put pressure on the pair. At the same time, the potential for growth remains.

The market cycle theory points to the recovery of the Australian dollar, which says that movement without correction is impossible.

At the end of 2018 and the beginning of 2019, the correction of the pair AUD/USD is expected. The main objectives and resistance levels are located at the levels: 0.7450-00, 0.7600 and 0.7700. The support levels are: 0.7200-0.7150, 0.7050 and 0.7000. In this case, the correction may not be as rapid as expected.

Anton Hanzenko