- AUD/USD surged more than 2.7% in the past few days
- The exchange rate is approaching the trend line resistance near 0.7420, where the shorts will probably regain the initiative and trigger a price turn lower
- Fundamentally, rising commodity prices, a strong Australian labor market and China's commitment to take measures to support the economy will provide catalysts for bullish momentum in the Australian dollar
At the end of January, the AUD/USD fell to a multi-year low around 0.6970 as uncertainty over the economic outlook was clouded by the Omicron outbreak sweeping the globe. However, the pair has since rebounded strongly, supported by improving epidemic conditions and rising raw material costs spurred by geopolitical conflicts in Eastern Europe.
Australia is a major exporter of iron ore, coal, oil and gas, gold, and alumina. These commodity prices have risen sharply since the outbreak of the Russia-Ukraine conflict, stimulating a significant increase in Australian trade, which has been a key factor in supporting the rise in the Australian dollar exchange rate.
Over the past two trading days, the Aussie's gains were driven by a number of additional catalysts that supported AUD/USD's rise of more than 2.7% to above the 0.7400 handle. First, China announced that it will take measures to support economic growth. A solid expansion of the Chinese economy will be good for the Australian dollar, due to the close trade relations between Australia and China.
The strength of the Australian labor market is also supportive of AUD/USD. Employment in Australia rose by 77,400 in February, almost doubling expectations, and the unemployment rate fell to 4%, a 13½-year low.
The Australian labor market's impressive performance will help drive consumer spending growth, thus prompting the market to believe that the Reserve Bank of Australia will start raising borrowing costs sooner than expected. Most traders still believe that the Reserve Bank of Australia will start raising interest rates in August, but there are some traders who prefer a June start. It is therefore important to watch the evolution of expectations and from a fundamental perspective, the near-term outlook for the Australian dollar could be further bullish if a June rate hike becomes the base scenario.
Technically, AUD/USD has gained more than 2.7% in the past few days, rising above its 200-day SMA, but is currently still limited by a key trendline resistance near 0.7420. If it fails to break through this resistance, the currency may turn lower, but if the bulls manage to break through the resistance, AUD/USD could rise towards 0.7490, which is the 50% Fib retracement of the February 2021-January 2022 downtrend. 50% Fib retracement level of the February 2021-January 2022 downtrend.
If the shorts regain the initiative and push the currency pair back down temporarily, support is seen around the psychological barrier at 0.7300. If it falls below this level, the shorts could continue to push the exchange rate down towards this week's low of 0.7165.
AUD/USD Technical Chart