AUD USD continues tight consolidation ahead of key data

AUD/USD continued to trade within a relatively tight range on Monday to start the new trading week. The past two weeks have seen the currency pair consolidate within a flag pattern formation just above the 0.7200 support level after having risen from near multi-year lows during the first weeks of October.

Usually, flag patterns are considered to be potential continuation formations, where the breakout is often expected to continue the directional move that preceded the flag – in this case, that direction was to the upside. Currently more pressing for AUD/USD than this technical pattern, however, are key economic data and news releases this week that could result in major breakout moves for the currency pair.

For the Australian dollar, Wednesday (in Australia) brings quarterly Consumer Price Index (CPI) data. This inflation release is often market-moving, as it helps to dictate the central bank’s monetary policy and stance on interest rates. Consumer prices for last quarter are expected to have risen by 0.7%. If the actual figure is greater than 0.7%, then the Australian dollar could see a boost that may result in an upside breakout for AUD/USD. The opposite could happen with a lower-than-expected number.

For the US dollar, Wednesday also brings the highly anticipated FOMC statement and Federal Funds rate from the US Fed. Although the Fed is not expected to make any interest rate changes this time around, the FOMC statement will be very closely studied by investors for clues as to the potential future timing of an initial rate hike. Any hawkish comments that may hint at a sooner rate hike should provide a boost for the US dollar, thereby pressuring AUD/USD to the downside. More dovish comments that may indicate a potentially later hike into 2016 should weigh on the US dollar, thereby potentially resulting in an upside breakout above the current flag pattern for AUD/USD.

Of course, if Wednesday’s Australian and US releases work together either to strengthen the Aussie while also weakening the greenback, or vice versa, the breakout potential for the currency pair should be magnified.

From a longer-term perspective, AUD/USD is still deeply entrenched within a sharp downtrend that has been in place for well more than a year. The longer-term directional bias also continues to be firmly to the downside.

On a short-term basis, however, an upside breakout above the current flag consolidation is still possible, which could then begin to target 0.7500-area resistance, where the 200-day moving average is also currently situated.

Any retreat as a result of this week’s data releases could prompt a sustained breakdown below key 0.7200 support, which could then lead to a re-targeting of the 0.7000 psychological support level near the multi-year lows.