AUD USD rises to critical resistance on US dollar pullback gold surge

AUD/USD (daily chart shown below) rose to critical resistance around the 0.7200 handle on Wednesday, primarily due to a weakened US dollar that was shaken by August’s unexpected drop in US inflation. Gold also surged on this inflation data, helping to further support the positively-correlated Australian dollar.

Earlier, the Reserve Bank of Australia (RBA) had released the minutes of its last monetary policy meeting. As expected, the RBA kept rates unchanged, but also took on somewhat of a dovish tone as it asserted a relatively negative outlook for the Australian economy. While this tone prompted a modest initial dip for the Australian dollar, AUD/USD was quick to recover on the weakness in the US inflation report.

Having reached up towards major resistance at 0.7200, AUD/USD is at a critical technical juncture. The past week-and-a-half have seen the currency pair rise from its new six-year low of 0.6903 in early September up to its current height just short of 0.7200. This rebound has also brought AUD/USD up to approach its key 50-day moving average, which has not been significantly breached to the upside since the substantial rally that began in mid-April.

The 0.7200 level has served as a key support/resistance level for the past few months, as it was a support target prior to its breakdown in late August, after which it has held strong thus far as resistance.

While the longer-term trend for AUD/USD continues to be strongly to the downside in light of continued commodity weakness and the likely future rate hike prospects for the US dollar, the short-term fate of the currency pair will primarily be driven by this week’s Fed decision on US interest rates.

In the event that the Fed postpones a September rate hike, AUD/USD will likely rally significantly, breaking above the 50-day moving average with an initial upside target potentially around the 0.7500 resistance level. In contrast, any decision to raise rates on Thursday should lead to an AUD/USD retreat back down towards the 0.7000 level, with a further, longer-term downside objective around 0.6800 support.