Recent News-Price Divergence Could Push AUDUSD to .8000

In last Friday’s Week Ahead Preview report, we noted that AUDUSD “[had] held up extremely well despite a surprise RBA rate cut and weak jobs report, suggesting that sellers may be growing exhausted around the .7700 handle…” As a general rule, when price action and the fundamental “news” diverge, price is usually proven correct; therefore, the relative resilience of AUDUSD over the last few weeks suggested that an eventual rally was likely (EURUSD’s failure to rally despite progress in the Greek debt talks could provide an opportunity to apply this same idea in reverse in the coming days).

AUDUSD bulls finally saw a respite from the negative fundamental news over the last 24 hours. Fed Chair Yellen’s semi-annual testimony to Congress was seen as noncommittal, disappointing buck bulls. Meanwhile, as my colleague Chris Tedder noted earlier, Australian wage price growth came out relatively weak as expected, but Chinese Manufacturing PMI actually clawed its way back above the 50 level, indicating that manufacturing activity in Australia’s biggest trading partner expanded modestly last month after two months of declines. This combination of a bearish USD catalyst and modestly upbeat news for Australia took the AUDUSD to a 1-month high at .7880.

Technical View: AUDUSD

On a technical basis, there are signs that the Aussie may be carving out a significant medium-term bottom. Beyond the price/news divergence noted above, the pair has quietly been putting in higher lows for the last three weeks. Meanwhile, the secondary indicators have also been improving over that period: both the RSI and MACD on the 4hr chart have been trending higher since late January, and the MACD is now above the “0” level, signaling outright bullish momentum.

As of writing, the pair is testing a key resistance level at .7880, which represents the 38.2% Fibonacci retracement of January’s downswing. If that barrier is eclipsed, a move up to key psychological resistance at .8000 or the 61.8% Fibonacci retracement at .8040 may be seen next. Even if rates pullback over the rest of this week, the technical bias will remain constructive above the most recent support level at .7740.