AUDUSD: Next Week's Trade Depends on Break of Short-Term Wedge Pattern

Heading into the final trading session of the week, the US Dollar index is on track for its 11th consecutive weekly gain, extending its longest winning streak since the currency became free floating in 1973. While this is undoubtedly the strongest trend in the market right now, there are risks to the buck’s rally heading into next week. From a fundamental perspective, if next Friday’s high-impact Non-Farm Payroll report comes in below 200k again, it could cause USD bulls to tap the breaks. On the technical side, the bullish-dollar momentum appears to be slowing down in some key pairs including EURUSD, USDJPY, and the focus of today’s piece, AUDUSD.

Looking at the 1hr chart, the AUDUSD has been in a falling wedge pattern for two full weeks now. While it is formed by a series of lower lows and lower highs, this classic price action pattern is typically seen as a bullish signal because it shows declining selling pressure on each additional thrust lower. That perspective is confirmed by the RSI indicator, which has now carved out a quadruple bullish divergence with price, showing waning bearish momentum.

On a very short-term basis, the unit put in a clear Morning Star* candlestick formation during today’s Asian session. This relatively rare 3-candle reversal pattern shows a shift from selling to buying pressure and is often seen at near-term lows in the market. Accompanied by the failed breakdown below the wedge pattern, this pattern hints at the potential for a more substantial rally if the pair can find a bullish catalyst early next week.

Despite some of the nascent signs of near-term bottom, bullish traders will want to exercise patience as long as the pair is below resistance from the upper trend line of the falling wedge pattern and the 100-hour MA around .8830. If rates manage to break above these short-term barriers, a quick move back toward .8900 or even .9000 may be seen given the deeply oversold conditions on the longer timeframes. Meanwhile, an extension of the recent USD uptrend could open the door for a move down to the AUDUSD’s 2014 low at .8660.

* A Morning Star candle formation is relatively rare candlestick formation created by a long bearish candle, followed a small-bodied candle near the low of the first candle, and completed by a long-bodied bullish candle. It represents a transition from selling to buying pressure and foreshadows more strength to come.