Australian Dollar Q3 2022 Technical Forecast: Change in Fortunes for AUD

A lot has changed from my Q2 Australian Dollar forecast from being one of the few currencies in the green against the U.S. dollar to almost 4.6% down year-to-date (see graphic below). This drop has come after commodity prices took a turn lower while the Chinese economy has been teetering due to its COVID-19 ‘zero-tolerance’ policy and economic growth fears.

Global Foreign Exchange Rates

Source: Reuters

A new wave of recessionary fears has amassed as central banks around the world are tightening monetary policies. This has hampered AUD upside as one of the traditional risk proxy‘s for FX markets. What may be turning the tide for the Aussie dollar is the convergence of the Federal Reserve & the RBA. While Q2 saw a more hawkish narrative from the Fed, the RBA has since joined the party and should quell the diverging central bank effect.

Of course, the Russia/Ukraine situation remains volatile and can definitely play a role in future price action for AUD/USD. This could come in the form of commodity price disruptions or changes in risk sentiment. The volatile situation will need to be monitored as it could shift the current outlook.

AUD/USD Technical Analysis AUD/USD Weekly Chart

Chart prepared by Warren Venketas, IG

The long-term picture outlines the recent bearish impetus however, the drive seems to be slowing as reflected by the Relative Strength Index (RSI) – similar picture in on the daily chart below. While there is still some room for additional AUD weakness, I think this will be brief should it unfold.

AUD/USD Daily Chart

Chart prepared by Warren Venketas, IG

The daily AUD/USD chart again reveals a slowing bearish momentum as expressed via the RSI oscillator. We can see the upward sloping trendline joining recent lows of the RSI while the corresponding price action indicates lower lows. This phenomenon is known as divergence and more specifically, bullish divergence.

Bullish divergence suggests an impending reversal in the recent AUD/USD downtrend in favour of AUD strength. Under the current fundamental backdrop, my projection for this pair is skewed towards the upside beyond 0.7000.

From a bearish perspective, a weekly candle close and subsequent confirmation close below the recent swing low at 0.6829 could invalidate this view and open up room for further downside towards the weekly trendline support zone.

Key Resistance Levels:

-0.7183 (61.8% Fibonacci level)

-0.7100

-0.7000

Key support levels:

-0.6829

-0.6777 (June 2020 swing low)