AUD USD breaks October high but faces strong resistance

Positive news out of Australia this past week and in recent weeks have contributed to a strengthening of the Australian dollar within the past month that has culminated in a tentative AUD/USD breakout on Friday above October’s 0.7381 high. This rise now establishes more than a three-month high for the currency pair.

This past week, the Reserve Bank of Australia (RBA) opted to keep interest rates on hold, as exports and economic conditions have improved in the past several months. Although it was acknowledged that the low inflation environment could lead to an interest rate cut in the near future, a better economic situation now has precluded that rate cut in December. This announcement served to boost the Australian dollar further.

In addition, quarterly GDP data out of Australia this week showed better-than-expected economic growth of 0.9% last quarter against prior expectations of 0.7% growth.

On the US side, a previously strong US dollar stumbled on Thursday as a result of the ECB rate announcement that made the euro surge. This led to a modest rise for AUD/USD. Friday’s US Non-Farm Payrolls report beat expectations, making an even stronger case for a Fed rate hike in December, but the data failed to move the US dollar in a substantial way, and AUD/USD fluctuated in an indecisive trading range.

Despite the recent boost for AUD/USD, the currency pair faces headwinds in the form of both an expected December rate hike by the Fed as well as key technical resistance factors. Besides the noted October high of 0.7381, the 200-day moving average is also not far to the upside and poses a significant resistance barrier, as AUD/USD has not closed above this key moving average for more than a year, since early September of 2014. Also immediately to the upside is the upper resistance border of a rising trend channel that has been in place since September’s multi-year lows.

In the event that AUD/USD remains under the noted 200-day moving average and turns back to the downside, the long-term downtrend could likely begin to reassert its bearish momentum. In this event, any move below the 0.7200 level and the 50-day moving average could pave the way for a return to the key 0.7000 psychological level, followed by September’s 0.6900-area lows. Any breakdown below 0.6900 would confirm a continuation of the long-term downtrend, with a further target at 0.6800 support.