With top tier catalysts from Australia and China, this week’s strategies focused mainly on Aussie dollar pairs.
We had arguably 3 out of 4 correct calls with direction, but AUD volatility was limited this week as traders balanced weak Australian data against broad risk sentiment moves highly influenced this week by U.S. debt ceiling deal developments.
Forex Setup of the Week: AUD/USD Is Heading For The Bottom Of A Range – May 15, 2023
On Monday, we spotted a textbook ranging pattern on AUD/USD’s four hour chart, with the pair clearly in a strong bearish move and fast approaching the bottom of the range.
We cited top tier events from both China and Australia as potential volatility catalysts for the Aussie, as well as a week heavy with Fed speak that may influence price action in the U.S. dollar and broad risk sentiment.
With the pair breaking below the middle of the range and simple moving averages with momentum, our bias lean was to be bearish on AUD/USD until it reached the bottom of the range around 0.6580, with a possible bounce and resistance retest as high as the 0.6750 minor psychological handle.
Volatility dipped since that discussion as the pair seems to be stuck in that 0.6600 – 0.6700. But overall, that bearish lean seems to be the dominant sentiment with lower highs forming throughout the week, mainly with the help of net bullish sentiment on the U.S. dollar through Thursday.
GBP/AUD: Tuesday – May 16, 2023
On Tuesday we focused on GBP/AUD as its consolidation and busy calendar for the U.K. and Australia is a potential breakout setup in the making.
At the time of writing, the U.K. actually released a net weaker-than-expected employment update and we said that we’d be on the lookout for potentially weak Australian jobs data to be the match to hopefully light upside momentum under the pair.
Well, AU jobs data did come in below expectations all around to bring in some selling pressure onto the Australian dollar, but it doesn’t seem like it was enough to spark a strong directional move in GBP/AUD.
The lack of upside momentum was likely due to Sterling also making arguments to draw in sellers, mainly from comments from Bank of England Governor Bailey who said that there were some indications that the pressure on inflation from the labor market was easing.
And on Thursday, momentum picked up in favor of the Aussie, likely due to broad risk sentiment shifting positive thanks to positive headlines from the U.S. debt ceiling deal front.
Overall, we were initially right with our directional strategy on the pair, but the volatility was light due to opposing fundamental narratives, pretty much keeping the pair at the same price that it traded on Tuesday.
AUD/JPY: Tuesday – May 16, 2023
We also spotted this consolidation pattern on AUD/JPY that matched well with an expected pick up in volatility for AUD from the Chinese data release on Tuesday.
Expectations for Chinese data were that markets expect stronger leading reports, which turned out to not be the case. China printed below expectations numbers with most data points, but improvements in some cases from previous readings.
This did lead to AUD/JPY weakness Tuesday and Wednesday, which was quickly forgotten as broad market sentiment turned bullish on Wednesday after comments from U.S. officials signals a potential deal for the U.S. to raise the debt ceiling and avoid debt default.
In my post, I mentioned a scenario in that “if the risk-friendly trading environment extends to the next trading sessions, then I’ll also be ready to trade a possible upside breakout and trade retests of the 91.80 or 92.50 previous highs.”
We actually saw this play out with the broad shift to risk-on on Thursday, likely drawing in further JPY selling on the session. AUD/JPY moved accordingly higher and tested the 92.35 handle before finding a top.
AUD/CHF: Thursday – May 18, 2023
On Thursday, AUD/CHF made it to the watchlist as the pair slowly faded lower after hitting the top of a textbook range on the 1-hour chart.
I noted that recent bearish vibes from weaker-than-expected employment data from Australia (raising odds of a pause from the RBA) and technical analysis arguments may potentially draw in further selling in the short-term.
I also noted that U.S. debt ceiling issue and banking sector troubles have kept safe-havens like the franc supported, which could likely draw in further AUD/CHF bears if that scenario played out further.
But the broad risk sentiment vibe went into positive mode as the narrative on the U.S. debt ceiling issue shifted towards a potential deal done as soon as this weekend, prompting traders away from safe havens on Thursday.
This is likely why we saw AUD/CHF move back to the top of the range on Friday, before selling pressure returned on U.S. debt ceiling news once again (GOP negotiators reportedly walked out on deal talks).
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