Signs point to further upside for AUDUSD in 2023

AFTER sliding from February 2021 to October 2022 and losing over 1,840 pips, the Australian dollar staged a rebound against the US dollar upon hitting a bottom at 0.617. The bullish rebound occurred on Oct 17 and the pair has been trending higher since, to the current levels around 0.697 at the time of writing on Jan 13, 2023. We hold a bullish view on the AUDUSD pair as signs point to a further upside in 2023.

The first clue that suggests that the AUDUSD will extend its gains in 2023 is a breakout from a large falling wedge chart pattern that stretched back to February 2021. A falling wedge is a typical bullish reversal chart pattern where prices trend lower in a narrower range with a series of lower highs and lower lows. Connecting the series of lower highs and lower lows, we would obtain two converging trend lines support and resistance that resemble a downward-slopping cone. A breakout above the upper band of a falling wedge is normally scrutinised, as it is a formidable indication that the downtrend is completed and prices are bound for a bullish reversal.

Secondly, AUDUSD also completed an inverse head and shoulders pattern that added validation to our bullish projection. The bullish reversal chart pattern that occurred from June 2022 till the first week of 2023 can be identified by three troughs that are bounded by a neckline resistance (which is also the resistance for the aforementioned falling wedge). Another key characteristic of an inverse head and shoulders pattern is that the first and third trough are similar in depth with the second trough being the deepest.

In terms of technical indicators, the Relative Strength Index (RSI) on the weekly chart paints a bullish picture as it pierced above the neutrality line at 50. The RSI is a momentum oscillator that suggests overbought conditions when the reading is above 70, while a reading below 30 shows an oversold condition. In a downtrend, the RSI tends to stay below 50. A cross above the 50 mark may signal a bullish trend reversal. Moreover, a bullish divergence where the RSI poses higher lows while the price creates lower lows suggests that selling momentum is waning and prices could be poised for a further ascent.

Looking ahead, we have our eyes on the next resistance levels around 0.712 (R1) and 0.728 (R2) in extension. Beyond R2, the breakout from the inverse head and shoulders pattern gave us a technical target at 0.766 (R3) while the falling wedge breakout provided us with a projection as high as the zone between 0.789 (R4) and psychological resistance at 0.8.

The writer is strategist at Phillip Nova