AUD/USD rebound provides opportunity for bears to reset shorts

• AUD/USD looked like it may breakdown on Thursday before a rally in US stocks and bonds saved the day
• The bullish hammer candle on the daily chart suggests AUD/USD may see some upside near-term
• AUD/USD looks to be forming a head and shoulders pattern longer-term

A rebound in US equities sparked by renewed earnings optimism and continued declines in US bond yields acted to snuff out a potential downside break in AUD/USD on Thursday, sending the pair sharply higher over the course of North American trade.

Risk-positive environment saves the day for AUD/USD

With the Magnificent 7 rallying hard into earnings from Apple, Meta Platforms and Amazon after the closing bell, with all except the former duly delivering on those bullish expectations, it was a positive risk environment during the session, seeing the AUD/USD rebound sharply after a brief dip below .6520. Concerns about the health of regional US banks saw traders add to Fed easing bets with around six rate cuts priced in again, weighing on US two-year yields and yield spreads with other major currencies, including the AUD.

You can see the net impact on the daily chart below, with the bullish hammer candle signaling AUD/USD may return to top of its trading range around .6610, should it be able to clear resistance at the 200-day moving average. However, given its prior track from above that level, a topside break appears unlikely near-term in the absence of a major positive catalyst.

AUD/USD still looks a sell-on-rallies prospect

Despite the latest rebound, it’s not difficult to spot the potential head and shoulder pattern on the AUD/USD daily chart, with a push towards .6610 providing an opportunity for bears to establish short positions – with a stop above for protection – targeting another potential push back to .6520. If that were to take place, plenty of traders will be eyeing off a more comprehensive downside break targeting the prior cycle lows below .6300.

Near-term, the January US nonfarm payrolls report looms as a key volatility event. However, unless there’s a big shift in the unemployment rate or average hourly earnings, the underlying message that labour market conditions are cooling rather than collapsing should keep market moves relative muted, if realised.

-- Written by David Scutt

Follow David on Twitter @scutty

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