AUD/USD Forecast: still rallying on dollar's weakness

• The US Federal Reserve will have a chance to revert current USD weakness.
• The dollar will need more than rate hikes to regain its crown, AUD/USD could be near an interim bottom.

The AUD/USD pair posted the largest weekly advance for the year, flirting with the 0.7300 level for the first time this month, and closing the week not far below it. The American dollar collapsed,  and the initial catalyst was an escalation of the trade war that fell below feared. US President Trump finally announced that the next round of tariffs on $200B on Chinese good will become effective next Sep 24, at a rate of 10%. China retaliated announcing tariffs on $60B on US goods, talks stalled, and menaces flew back and forth, but that 10% and not a 25% rate, was sort of a relief headline. Equities began rallying, with US indexes challenging record highs, and dollar's broad weakness even helped base metals to bounce sharply, which ended up benefiting further the AUD.

Dollar's rally seemed overstretched a month ago, and what started as a due correction could be well become a trend change, as multiple key levels were blown without second thoughts. The greenback fought back on Friday, which means not all is lost for dollar's bulls. The recovery was helped by Brexit headlines, which means that the dollar is now appreciating amid its safe-haven condition in times of fear, and not due to self-strength. Think about that when taking your next USD long.

 Australian data was overall soft, but that didn't prevent the Aussie from running on dollar's sell-off, as there were no first-tier releases, neither big surprises.

The RBA released the Minutes of its September meeting, repeating that, while there's no strong case to change the current policy, the next move in rates will likely be up. Policymakers added that despite the ongoing risk amid global trade, a softer Aussie has supported local growth.

The Westpac-Melbourne Institute leading index signaled a slowing growth momentum into the second half of 2018 and early 2019, as the pace of economic activity relative to trend for the next three to nine months fell to -0.2% in August, well below the previous month 0.5%.

The upcoming week will start with holidays in Australia and China, which may result in ultra-thin trading around the AUD/USD pair, with nothing relevant scheduled in Australia, and only the Chinese Caixin Manufacturing PMI for September in the calendar for next Friday. In the data front, however, the most relevant event next week will be no doubts the Fed meeting, which includes economic projections, and Powell's speech. A rate hike has been largely priced in.

Softer-than-expected US data at the end of the week and persistent strength in Wall Street kept the pair at its highs at the end of the week.

AUD/USD technical outlook

The AUD/USD pair broke above the 61.8% retracement of its 0.7361/0.7084 slide at 0.7255, now the immediate relevant support. Should the pair firm up above the 0.7300 figure, then the top of the range is the first possible bullish target for the next week.

The long-term perspective, according to the weekly chart, indicates that the movement is still a correction that of course, could continue after the pair has been on the negative side pretty much since February begun. In the mentioned chart, the 20 SMA maintains a strong downward slope far above the current level and below the larger ones, while technical indicators have bounced sharply from oversold territory, but remain well below their mid-lines. Should the pair surpass the 0.7360 region next week, chances of further gains will be more clear.

In the daily chart, technical indicators have lost upward momentum, but remain at levels last seen in May, while the price is far above its 20 DMA, currently converging with the 38.2% retracement of the mentioned decline at around 0.7190. Bears could retake control of the pair on a break below it.

 AUD/USD sentiment poll

According to the FXStreet Forecast Poll, the AUD/USD pair remains under control of bears, which are a large majority in the 1-week and 1-month perspectives, although the average targets in both are above the 0.7250 region. In the 3-month outlook, bulls take over, up to 58% from the previous 53%, and with the average target lifted from 0.7273 to 0.7343.

The Overview chart shows that moving averages are flipping to the upside,  with uneven strength the momentum is so far stronger in the short term but fades in the monthly one as the largest accumulation of targets is closer to 0.70/0.71. In the 3-month view, however, most investors see higher highs above 0.7400, a sign that dollar will need more than rate hikes to regain its crown.

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