AUD/USD Forecast: dollar weakness backed a rally but fundamentals say different

• Australian and Chinese data keep indicating soft economic growth.
• Market players need to find a new balance that includes a dovish Fed.

 The Australian dollar is sharply up for a second consecutive week against its American rival, up this Friday for an eighth consecutive day to reach 0.7234, its highest since mid-December. The rally was all about dollar's weakness, as the background factors that sent it to an almost a decade low this month remain there. Global growth keeps slowing and Chinese data keeps disappointing. The market is also suffering from the winter holiday's hangover, no strange to wide intraday moves amid low volatility and the following slow return to trading desks.

The dollar weakened initially on encouraging trade war headlines, which fueled risk appetite in detriment of safe-haven assets, including government bonds, with Treasury yields recovering nicely. The greenback attempted a recovery, but market players forgot about the China-US trade relation once Fed's members hit the wires on Wednesday, and ahead of the FOMC Meeting's Minutes release. Officers were quite dovish, with Atlanta's Bostic opening doors for a rate cut triggering a dollar sell-off. The Minutes showed that some members voted against a rate hike in December, further fueling speculation that the central bank is close to pause its tightening cycle.

Another factor playing against the greenback is the lack of official data, due to the government partial shutdown, which has lasted 21 days up to this Friday, matching the longest on record. Neither Trump, nor Democrats are willing to give up, and the US President has menaced to declare a national emergency and go on with building the Wall.

Australian data released these days was for the most disappointing, as in December, the AIG Manufacturing Index fell to 49.5, the Services index resulted at 52.1 while the Construction index resulted at 42.6, all of them below November readings, indicating slowing business activity. Building Permits collapsed in November, accumulating a  whopping 32.8% decline, with the only encouraging reading being Retail Sales up by 0.4% monthly basis. China released inflation data, which remained unchanged in December, when compared to the previous month, leaving the annual reading at 1.9%, below the previous 2.2% and the expected 2.1%.

China will kick start next week by releasing December trade data while Australia will release inflation estimates, all of them capable to trigger large moves in AUD/USD. Minor figures will be out through the week, but sentiment and political-related headlines will likely overshadow those.

The US calendar will depend on how things develop with the shutdown and announcements from US President Trump, suspected for the weekend.

AUD/USD Technical Outlook

The pair holds trimmed daily gains as the dollar got better bid at the end of the week amid falling equities, and profit taking ahead of the weekend. Technically, the weekly chart shows that the pair has firmed up above a bearish 20 SMA, still far below the larger ones,  as the Momentum indicator heads north at fresh multi-month highs above its mid-line, while the RSI also recovered and heads higher, but at around 48. More relevant, the pair is above the 61.8% retracement of its December/January decline at 0.7155. The upside is favored as long as above this last, although a strong static resistance comes at 0.7250, followed by the 0.7300 figure where selling interest is expected to be larger.

In the daily chart, the pair extended its recovery above its 100 DMA after surpassing the 20 DMA in the previous one, with only the 200 DMA in the way of a bullish run, currently around 0.7280. Technical indicators have lost their upward momentum but hold within positive levels, maintaining the risk skewed to the upside for the upcoming for the upcoming days, as long as the mentioned 0.7155 holds. Below it, the 50% retracement of the mentioned slump comes at 0.7080 being the next support/bearish target in the case of a dollar's recovery, or steeper growth concerns playing against the Aussie.

AUD/USD sentiment poll

The FXStreet Forecast Poll indicates that investors are waiting for an upward extension from the current level, with bulls up to 71% weekly basis, although with an average target of 0.7212. Bulls also are a majority in the 1 and 3 months perspectives, although with a strong decrease from the weekly view, as only 35% of the polled experts see it advancing in 1 month, and 48% in the quarter.

The Overview chart shows a strong bullish potential for the upcoming week, with the pair seen closer to 0.73/0.74. The moving average momentum disappears in the monthly and quarterly perspectives, turning back neutral. The long-term view shows as usual lately a wide range of possible targets, reflecting the political and growth uncertainty.

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