AUD/USD drops and pops in the open, closing the gap despite risk-off

• Commodities complex was heavily impacted by the attack on Saudi Arabia’s oil facilities.
• AUD/USD opened the week with a bearish gap on the knee jerk.

AUD/USD opened the week with a bearish gap on the reaction to the increased tensions in the Middle East following the attack on Saudi Arabia’s oil and gas facilities in Abqaiq which has suspended half of the kingdom’s processing, corresponding to 6% of world supply. AUD/USD is currently trading at the highs of the day at 0.6879 having recovered from the drop to 0.6861. 

The commodities complex was heavily impacted on the news that Saudi Arabia’s oil production was cut in half after explosive drones attacked Aramco’s Abqaiq plant and set it ablaze. Oil spiked a whopping 15% in the open causing ripples across commodity-related asset classes. 

"We expect the market to quickly price in a sizeable geopolitical risk premium," analysts at ANZ Bank explained. "Any expectation that the market had about the US easing sanctions on Iran following President Trump’s dismissal of John Bolton will quickly dissipate. This should see Brent crude test the US70/bbl mark in the short term. Any further upside will depend on the length of the disruption."

All eyes turn to the Fed

Meanwhile, the week ahead holds the Federal Reserve interest rate decision where 25 basis point cut is already priced into the markets. However, we will also get new forecasts from the central bank and analysts at ING Bank said we are likely to see some modest downward revisions to growth from the numbers published in June. "On balance, the median forecast of Federal Reserve officials is likely to signal one additional rate cut in the current cycle, maybe in 2020, but this will matter little to markets. After all the June median forecast had no rate cuts for 2019 and by the end of Wednesday, the Fed will have conducted two 25bp cuts within three months of publishing that prediction."

AUD/USD levels 

Valeria Bednarik, the Chief Analyst at FXStreet, noted that the AUD/USD pair has stalled its recovery around the 50% retracement of its July/August decline, having failed to break above it throughout the week:

"Still, technical readings in the daily chart maintain the risk skewed to the upside, as the pair is developing above a bullish 20 SMA, while technical indicators hold on to weekly highs, lacking directional strength but well into positive ground. In the shorter term, and according to the 4 hours chart, the pair is giving signs of upward exhaustion, as it has spent the last couple of days resting above a flat 20 SMA, while technical indicators ease within positive levels. The pair could begin correcting lower once below 0.6830, but bearish won’t take the lead unless it loses 0.6770."