AUD/USD in search of fifth weekly gains but buyers may run into trouble soon

Technical Analysis

Author: Justin Low | audusd

AUD/USD rises towards the 0.7000 handle for the first time since July

AUD/USD W1 31-12
ForexLive
The aussie is continuing to take advantage of the weaker dollar in year-end trading as price breaks through a few key technical levels - notably the 200-day moving average - and is now trading up towards the 0.7000 handle for the first time since July.

Despite the positive trajectory over the past few weeks, there is still much more work to be done by buyers in order to try and secure more upside momentum down the road.

Currently, there is notable resistance around 0.7000 and at the 23.6 retracement level @ 0.7017 with further resistance then seen towards 0.7082 next.

From a technical perspective, those are some decent levels for sellers to lean on - especially once liquidity conditions return back to normal and there is a bias to do so.

For one, RBA rate cut odds for February remain in tact at 38.3% as of today. As such, if the labour market report (23 January) and CPI data (29 January) fail to live up to the billing, we could see markets start to turn their backs on the aussie in due time.

In any case, as I have mentioned before, AUD/USD is one that has been largely dictated by yield differentials over the past two years and I would expect next year to be the same:

AUD/USD vs Yields
The recent narrowing in the yield differentials is part and parcel of the climb in the pair this week amid year-end flows - which is also exacerbated by thin liquidity conditions.

As things return back to normal in the next week, look towards the key technical levels above and if they will play a role in limiting the upside potential in the pair. Put that together with the RBA outlook, it could make for one of the more trendier trades to start the new year.

In essence, buyers have much work to do to try and extend the upside momentum but if they can succeed in doing so, we could see more of a squeeze. However, if Australian economic data continues to struggle, the path of least resistance for the aussie is naturally lower.

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