Home Forex Market Analysis AUD/USD Forecast: Bearish Pennant Points to a Drop to 0.700

AUD/USD Forecast: Bearish Pennant Points to a Drop to 0.700

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AUD/USD Forecast: Bearish Pennant Points to a Drop to 0.700

The AUD/USD is hovering near the lowest level since December 2020 as Australia continues battling the new Covid-19 wave. The pair has dropped to 0.7392, which is about 7.70% below the highest level this year.

Australian dollar under pressure

The Australian economy outperformed developed peers in 2020 since the country managed the Covid-19 situation better than others. 

Further, the country was supported by the relatively higher commodity prices, and China rebound. That was notable since China is the country’s biggest trading partner. Australia is also a leading exporter of key commodities like iron ore and coal.

However, the country is battling a new Covid-19 wave that has pushed some states to announce new lockdowns. As a result, recent data from Australia have been relatively weak. For example, data published on Wednesday showed that the construction index declined from 58.6 in June to 48.7 in July.

The important services sector also saw the low activity as the country battled the new virus. The Australian services PMI declined from 56.8 in June to 44.2 in July. A PMI reading below 50 is usually a sign that a sector is in a contraction mode. The report cited the closure of key service providers like restaurants and hotels. 

Meanwhile, the AUD/USD declined after the retail sector lagged. The volume of retail sales in the second quarter rose by just 0.8% after falling by 0.5% in the previous sector. In August alone, the sales declined by 1.8%. 

Therefore, there is a possibility that the Australian economy will have a slower recovery than earlier expected. This performance will also be due to the fact that commodity prices could move lower.

RBA decision

It is against this backdrop that the Reserve Bank of Australia (RBA) concluded its monthly meeting on Tuesday. The decision was relatively cautious. The bank decided to leave interest rates unchanged for the 9th consecutive month. It also decided to leave its yield curve control program intact. In it, the bank is controlling the yield of bonds maturing in April 2024 at 0.10%.

Further, the RBA decided to tweak its asset purchase program. It will slow the monthly asset purchases to A$4 billion in September. Some analysts expect that the bank will maintain a cautious approach if the new outbreak continues.

US jobs data ahead

The next key catalyst for the AUD/USD will be the latest US jobs numbers that will come out on Friday. The numbers come at a time when there is an ongoing labour shortage in the country. Companies are also contending with higher wages. 

Still, there are concerns that the outbreak in the US will slow the labour uptake. For example, data published on Wednesday showed that the American economy added just 330k jobs in July. That was substantially lower than the number it added in June. 

Economists expect the data to show that the economy added more than 700k jobs in July while the unemployment rate moved lower to 5.7%.

AUD/USD technical forecast

The daily chart shows that the AUD/USD formed a head and shoulders pattern early this year. The neckline of this pattern was at 0.7570. The pair broke out below this neckline on June 28. It also declined below the 25-day and 50-day Moving Averages. 

AUD/USD technical chart, showing the head and shoulder pattern, the market staying under Moving Averages, and the current bearish pennant pattern.

Now, the pair has formed a bearish pennant pattern, which usually points to further decline. The Relative Strength Index (RSI) has also moved from the oversold level of 29 to 45. Therefore, the pair will likely break out lower as bears target the next key support at 0.700.

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