AUD/USD: Break and Retest Pattern in Play After Hawkish Fed

Jun 17, 2021 07:17 PM ET
AUD/USD: Break and Retest Pattern in Play After Hawkish Fed

The AUD/USD pair declined sharply after the relatively hawkish Federal Reserve. It fell to 0.7597, which was more than 3.70% below the highest level this year. It has also dropped below the important support at 0.7645, the lowest level this month.

Federal Reserve decision

The Fed completed its monetary policy meeting on Wednesday. To a large extent, the bank did what most analysts were expecting. It left interest rates unchanged between 0% and 0.25%. It also left its asset purchase program intact at $120 billion per month. This program has pushed its balance sheet from more than $4 trillion to almost $8 trillion.

The AUD/USD dropped sharply after the decision because of what the Fed hinted. The closely-watched dot plot showed that members believed that the bank would start hiking interest rates in 2023. More members of the panel also predicted that the bank would start hiking interest rates in 2022.

The FOMC also started to deliberate on tapering the quantitative easing program. This is a situation where the bank starts to slow down the pace of these purchases. While it did not give a timeline for this tapering, analysts expect that it will happen in the third quarter of this year.

The hawkish Fed decision was a U-turn from the previous Fed talk. In the previous decisions, the bank insisted that it would leave rates and its other policies intact since the economic recovery was transitory in nature. 

The decision came at a time when economic data from the United States have been relatively strong. Consumer and producer prices have surged while the unemployment rate has declined to a post-pandemic low of 5.8%. Similarly, house prices have surged while the services and manufacturing sector is doing relatively well.

Australia jobs data

After dropping sharply on Wednesday, the pair made a relief rally on Thursday morning as investors reacted to the relatively strong data from Australia. 

The numbers revealed that the country added more than 115,000 jobs from April to May after it shed more than 30,000 jobs in the previous month. The reading was significantly higher than the median estimate of 30,000.

In the same period, the country’s unemployment rate declined from 5.5% to 5.1%, which was lower than in March 2020. This happened as more companies, especially in the services sector, continued to employ as the country reopened. At the same time, the average number of hours worked increased in May while the participation rate rose by 0.3% to 66.2%.

These numbers show that the country is having a strong recovery helped by both reopening and the strength of the mining and technology sectors. However, there are signs that this growth will start slowing down as demand from China falls. Data published on Wednesday showed that the country’s industrial production and fixed asset investments declined in May.

AUD/USD technical analysis

The four-hour chart shows that the AUD/USD pair has been forming a head and shoulders pattern whose neckline was at 0.7682. 

AUD/USD chart

In technical analysis, the head and shoulders top pattern is usually a bearish signal. The pair has also managed to move below the 25-day and 15-day Moving Averages, which is a bearish signal as well. 

It was also forming a bearish descending triangle pattern (see the red trendline). Therefore, in the near term, the pair will likely stage a relief rally and then resume the downward trendline. This is known as a break and retest strategy. However, a move above 0.7700 will invalidate this scenario.

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