Australian Dollar Breaks Range but Lacks Follow Through. Will AUD/USD Reverse?

Australian Dollar, AUD/USD, Bollinger Bands, Fibonacci, Volatility – Talking Points

• of Australian dollar Exceeded that range last week, but appears to be on pause
• April building approvals softened, but AUD appears to be ignoring it
• Technical situation may create next move for Australian player

The Australian dollar continued its gains on Tuesday despite slightly weaker domestic data. The number of building approvals in April fell 8.1% from the previous month, below the previous forecast of a 2% increase and -1.0%.

The data could support rates markets’ view that the Reserve Bank of Australia will keep rates unchanged at next week’s monetary policy meeting.

AUD/USD Technical Analysis

AUD/USD broke out of the three-month range of 0.6565-0.6818 last week on the way to a six-month break at 0.6490.

Before breaking out of the lower end of the range, the Australian made several unsuccessful attempts to break out. False breaks like this can be frustrating for traders looking to play ranges.

The downtrend also saw the price break below the 21-day Simple Moving Average (SMA) lower bound. Bollinger Bands.

Such a break is sometimes seen as a volatility breakout, and price movements following such a move can be clues to short-term direction.

If the price stays outside the band, it could suggest that the momentum is evolving in that direction, which in this case is bearish.

However, a close within the bands may indicate a possible bear market pause or reversal. AUD/USD closed inside the band on Friday, but has shown a modest gain since the beginning of the week.

What is clear is that realized volatility is increasing, as evidenced by the widening of the Bollinger Bands.

Looking at the price of one-month at-the-money (ATM) implied volatility options, the market has barely moved, currently trading just over 10%. This may suggest that the currency market is less concerned about the AUD’s recent weakness.

Support is likely at the recent low of 0.6490. Further down, support is likely at the previous low of 0.6387 and the nearby Fibonacci level of 0.6381. The latter is the 78.6% Fibonacci retracement of the movement from the low of 0.6170 to the peak of 0.7158.

On the upside, resistance may be at the nearby breakpoints of 0.6565 and 0.6575, or the previous peaks of 0.6675 and 0.6710. Further up, the 0.6780 – 0.6820 area could be a more important resistance zone with some past highs and breakpoints.

Charts created with TradingView

— By Daniel McCarthy, DailyFX.com Strategist

Please contact Daniel. @DanMicCarthyFX on Twitter