In the past few days, key commodity prices have been in a strong bearish trend

Bearish view

• Sell the AUD/USD pair and set a take-profit at 0.6830.
• Add a stop-loss at 0.7020.
• Timeline: 2 days.

Bullish view

• Set a buy-stop at 0.700 and a take-profit at 0.7050.
• Add a stop-loss at 0.6950.

The AUD/USD pair moved sideways on Tuesday morning after the latest minutes by the Reserve Bank of Australia (RBA). It is also reacting to the falling iron ore prices as concerns about global growth remains. The pair is trading at 0.6957, which is slightly below this week’s high of 0.700.

Global recession worries

The Australian dollar has struggled in the past few days as investors continue worrying about the global economy as central banks embrace a more hawkish tone.

According to the Wall Street Journal, odds of an American recession happening in 2022 rose to 44% from the previous 26%. The report was based on estimates by leading economists in the US.

The AUD/USD pair tends to underperform in periods of weak output because of the role commodities play in Australia. The country exports key commodities like coal, natural gas, and iron ore.

This explains why the pair is struggling. In the past few days, key commodity prices have been in a strong bearish trend. For example, copper has tumbled to the lowest level in more than 12 months. Similarly, iron ore has crashed as investors anticipate weak spending as interest rates rise.

The pair is also under pressure as investors reflect on the actions of the Fed and the Reserve Bank of Australia (RBA). Last week, the Fed decided to hike interest rates by 0.75%, the biggest increase in almost three decades. Officials also hinted that more hikes were on the way.

The decision came a week after the RBA surprised investors by hiking rates by 0.50%. Analysts were expecting a 0.25% hike. Minutes published earlier on Tuesday revealed that officials expressed hopes that they will continue hiking rates in the upcoming meetings. But they also cautioned that inflation will continue as the crisis in Ukraine escalates.

AUD/USD forecast

The four-hour chart shows that the AUD/USD pair has formed what looks like an inverted cup and handle pattern that is shown in black. The lower side of this pattern is at 0.6831. The pair remains slightly below the 25-day and 50-day moving averages.

It has moved to the standard pivot point while oscillators are pointing downwards. Therefore, because of the inverted cup and handle pattern, there is a possibility that it will have a bearish breakout to the first support at 0.6831.

We have a couple of important levels to pay attention to, so trade accordingly.

The Australian dollar initially collapsed on Wednesday but then turned around to show signs of life yet again. The 0.75 handle is an area that is going to be very difficult to deal with, but it must be noted that the market did recover quite nicely to show signs of life again. If that is going to be the case, it is likely that we will see noisy behavior at best. This is a market that will move upon risk appetite, as well as the commodity markets. Keep an eye on both in order to see where we are going next.

It will be interesting to see how this plays out, because this is an area that I think will determine the longer-term trend for the Australian dollar going forward. If we can clear the 0.76 handle, we could possibly be entering a “buy-and-hold” regime for the Aussie dollar, allowing it to go as high as 0.78 over the next several months. This will almost undoubtedly be due to inflation, but one also has to keep in mind that the US dollar is considered to be a safe currency, and there are plenty of things to hide from at the moment. Because of this, I think the Aussie dollar will continue to be very difficult to deal with because there will be a constant “push-pull” in this market.

If we were to break down below the lows of the trading session on Wednesday, that would be a sufficient reason to think that this market will break down rather drastically. The market at that point would almost certainly go looking towards the 0.74 handle, where there will be a certain amount of support, extending down to the 0.7375 handle. This would obviously be more “risk-off” than anything else, as it would show a strengthening US dollar.

There have been some rumors of peace in Ukraine, and that helps the idea of a risk currency such as the Australian dollar. Furthermore, the 50-day EMA is starting to turn to the upside and looks ready to break above the 200-day EMA. Ultimately, this is a market that has some decisions to make in the short term, so the next couple of days could be very noisy. We have a couple of important levels to pay attention to, so trade accordingly.