Australian Dollar to Reverse as Markets Double Down on Fed Cut?

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Asia Pacific Market Open Talking Points

  • Australian and New Zealand Dollars gained as US Dollar depreciated
  • Dismal US data has fueled more certainty in an October Fed rate cut
  • AUD/USD may reverse on technical signs, but sentiment outlook mixed

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Australian and New Zealand Dollars Capitalize on US Dollar Losses

The pro-risk Australian and New Zealand Dollars staged a comeback against the US Dollar on Thursday. This is despite a slew of worse-than-expected Markit European PMIs which were followed by the softest US ISM non-manufacturing PMI outcome in three years. At one point, the S&P 500 and Dow Jones – key benchmarks of sentiment – were down over one percent before trimming losses and ending the day higher.

Following the slew of disappointing economic data out of the United States this week, attention began shifting to the Federal Reserve as local government bond yields tumbled. The markets are now anticipating the central bank of the world’s-largest economy to further reduce rates by 25bp this month. According to Fed funds futures, those odds are now at about 85 percent probability, up from 47% odds one week ago.

Friday’s Asia Pacific Trading Session

With that in mind, the reversal in risk trends during the Wall Street trading session may pave the way for a rosy start to Friday’s Asia Pacific trading session. But, follow-through will likely have to wait until the US jobs report crosses the wires later in the day to see if the trajectory of disappointing data continues. Further down the road, all eyes will turn to US-China trade talks after a new front opened up across the Atlantic.

Australian Dollar Technical Analysis

Amid these fundamental developments, it is interesting to see a Morning Star candlestick pattern emerge in AUD/USD. This is a bullish formation that with confirmation, via a daily close higher, could open the door to testing potential descending resistance from July. This is also after the key support held between a range of 0.6678 to 0.6717.

AUD/USD Sentiment Analysis

Further adding to this setup is a mixed outlook in AUD/USD from IG Client Sentiment, indicating indecision. Positioning is less net-long than yesterday but more net-long from last week according to the latest report from October 3. To learn more about using this as another element in analyzing markets, join me every week on Wednesdays at 00:00 GMT as I uncover what market positioning is saying about recent trends in forex.

AUD/USD Daily Chart

Chart Created Using TradingView

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— Written by Daniel Dubrovsky, Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

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