AUDUSD expected to rebound before resuming downtrend

AFTER topping out at 0.80 in February 2022, the Australian dollar has lost 20 per cent of its value against the US dollar and currently hovers around the 0.64 region. Year-to-date, the AUDUSD currency pair is also down by over 5 per cent. Looking ahead, we project a continuation of the strong downtrend due to a lack of evidence for a lasting bullish reversal. However, in the short term, we do expect a short rebound before the pair resumes the downtrend. In this report, we will elaborate on a few observations that support our projection of the AUDUSD performance.

To start off, the AUDUSD downtrend becomes evident when we examine the weekly chart. Since February 2022, the AUDUSD pair has consistently formed lower highs and lower lows. By drawing two trendlines connecting these higher highs and lower lows, respectively, we actually establish parallel resistance and support trendlines, which display a descending channel. In technical analysis, a descending channel typically indicates a bearish market bias, and presents traders with opportunities to sell near the upper trendline and buy near the lower trendline. Looking back, the AUDUSD pair has been trapped within this formation with the only exception being the period between September and November 2022, when prices broke down briefly from the formation. For the end of this year, we foresee further downside for the AUDUSD pair, testing the lower support band of the channel by year-end.

In the shorter term, however, we anticipate a temporary move higher due to a bullish divergence in the Relative Strength Index (RSI). The RSI is a momentum indicator that suggests overbought conditions when its graph is above 70, and oversold when it is below 30. For readings below the neutral line of 50, it means the prevailing momentum is bearish. At the time of writing, the RSI is in bearish territory at around 41, which echoes our overall bearish sentiment mentioned earlier.

Despite the bearish momentum, we spotted a bullish divergence which started in August. A bullish divergence is identified when the chart prices create lower highs while the RSI reading creates higher highs. This is an indication that the bearish momentum is waning and prices are bound for reversal to the upside.

Looking ahead, we project a short-term rebound to our target at R1 (0.659) as it is a previous support-turned-resistance level. If the price pierces above R1, it would be heading to test the formidable resistance zone R2 (0.67) which coincides with the upper band of the descending channel. The aforementioned resistance levels could be potential entries for short positions as the probability of a continued downtrend to targets at S1 (0.635) and S2 (0.617) remains high.

The writer is strategist at Phillip Nova