AUD/USD bearish gap being corrected, but downside risks prevail to 0.7250 at least

The risk-off sentiment is strong following Friday's mayhem around the Turkish Lira, off-shore dollar liquidity stresses and what it all might mean for the eurozone banking sector. Equally, there are downside risks for the Aussie on a domestic front following the RBA's dovish SOMP on concerns about U.S.-China trade risks that are increasing.

AUD/USD was affected by the risk aversion on Friday, dropping from 0.7370 at lunchtime Friday in Sydney to 0.7251 very early Monday. This was the lowest level traded since January 2017. Meanwhile, despite being highly anticipated, the US data actually had a little impact. US CPI rose 0.2% in July, for an annual gain of 2.9% - both as expected but the annual level is now just a touch away from the 3% mark. (The core version rose 0.24% in July and 2.4% annually (vs 2.3% expected) – a decade high, and continuing the acceleration seen so far this year - which should underpin the US dollar when figuring it was the fastest YoY rate since 2008 and coupled with US Q2 growth reaching 4.2%).

Looking ahead: to close the gap or not to close the gap...?

Looking ahead, while today is quiet on the domestic calendar, there are plenty of data later on this week for Australia. We will have the employment, wages and consumer data along with business confidence. For today, the Lira and a potential EZ banking crisis and the risk of a run on Turkey's banks in the coming days will be at the forefront of markets - a break of 0.7250 might be a more plausible bet than a sustained close of the opening bearish gap.

AUD/USD levels

AUD/USD analysis: steeper decline expected on a break below 0.7250

Valeria Bednarik, chief analyst at FXStreet explained that the pair broke its previous 7-week range to the downside, anticipating a steeper decline ahead:

"In the daily chart, it´s now some 100 pips below a flat 100 DMA, while technical indicators maintain their sharp downward slopes well into negative territory."

In the 4 hours chart, Valeria noted that the technical indicators pared their declines, now directionless in extremely oversold level: "The 20 SMA crossed below the larger ones, all of them in the 0.7380/0.7400 region. Sellers should contain rallies in the 0.7310/20 region to maintain the bearish potential firm in place".