AUD/USD Faces A Fed Test As Bearish Signals Build

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This currency pair edged lower in early trade on Tuesday, pressured by dollar strength as investors bid up the Greenback amid rising tensions in the Middle East and expectations that the Federal Reserve will raise interest rates later this week. The recent sell-off has traders questioning whether the AUD/USD currency pair has entered a new downtrend or is simply undergoing a pullback within a longer-term uptrend Hike Expectations and Oil Prices Pressure AUD/USD

The pair entered this week under pressure as market participants have now priced in a near certain U.S. interest rate hike this week and flocked to the safe-haven dollar following escalating tension in the Middle East that has pushed West Texas Intermediate back over the psychological $100 mark. Both developments drove closely watched 10-year Treasury yields to breach the psychological 5% level on Monday for the first time in nearly three years

Money markets now point to a 90% chance that the Federal Reserve will lift its benchmark funding rate on Wednesday following a slew to better-than-expected economic data in recent weeks and soaring energy prices. That's up from 60% just a week ago, narrowing the interest rate outlook between the Fed and Reserve Bank of Australia (RBA), the main catalyst driving the Australian dollar's current downward reversal.

Sentiment for the pair also soured after the postponement of a meeting between Tehran and its Gulf neighbors, dashed hopes of diplomatic efforts to imminently end the U.S. – Iran conflict, with ongoing attacks on ships in the region denting risk-on currencies like the Australian dollar. Consequently, the AUD/USD will likely remain on the defensive unless a broader de-escalation in geopolitical hostilities stabilizes energy markets/USD Channel Break and Death Cross Highlight Bearish Momentum

Since breaking down below an ascending channel late last week, the pair has continued to trend lower in a textbook Elliot Wave pattern, potentially indicating another wave lower before a consolidation period. It's also worth pointing out that the 50 moving average (MA) crossed below the 200 MA last week to form an ominous“death cross,” a chart pattern that signals a new downtrend.

AUD/USD Price Chart Showing Bearish Channel BreakdownAUD/USD Support Levels: 0.7110 and 0.7065

Near-term selling could initially see a retest of support around 0.7110. This area on the chart may act as a floor near a horizontal trendline that connects the prominent August 20 and September 14 swing lows.

The bulls' failure to successfully defend this important level opens the door for a move down toward 0.7065. Tactical traders may look to open long positions in this location near the notable August 19 trough. This area also roughly aligns with a bars pattern downside target that takes the pair's most recent move lower and overlays it from Monday's countertrend high. This price action would complete a textbook Elliot Wave pattern with five distinct moves/USD Resistance Levels: 0.7180 and 0.7205

During recovery efforts, it's initially worth monitoring the 0.7180 area. Those who have accumulated positions throughout the pair's recent weakness could seek profit-taking opportunities near a trendline linking the August 21 and September 11 peaks.

A recovery above this level could see the AUD/USD test overhead resistance around 0.7205. The pair may run into selling pressure in this area near a series of corresponding price action on the chart stretching between late August and early September Could Confirm a Sustained AUD/USD Downtrend

The AUD/USD appears to have entered a new downtrend, with bearish technicals and fundamentals aligning to place downward pressure on the pair. The formation of an ominous“death cross” and expectations that the Federal Reserve will hike rates this week underpins the recent bearish price action and opens the door to further near-term declines.

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EURUSD Chart by TradingView

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