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The Australian Dollar Takes a Hit as the US Dollar Regains its Dominance: A Look at the AUD Outlook

Last week, the Australian Dollar surged to a new peak, only to fall back down as the US Dollar regained its dominance towards the end of the week. Despite this, AUD/USD remains in the same range it has been in for several months, with little movement even as US and Chinese inflation gauges softened.

While the US saw a decrease in price pressures, the same cannot be told for China, which may be a reason for the global growth in 2023. The US Dollar found support as a safe haven currency, while industrial metals slid lower due to less anticipated demand from China.

This has led to lower expectations for economic activity and pressure on key Australian exports like aluminum, copper, iron ore, and wheat. Despite this, the ASX 200 equity index posted a small gain, and global equity indices were largely unaffected.

However, there has been an uptick in volatility in currencies due to a surge in US Dollar buying, indicating some risk aversion. AUD/USD made an 11-week high before collapsing back inside the same range it has been in since February 24th, indicating a false break.

The abrupt U-turn may suggest short-term bearish momentum, with potential for the Double Bottom levels of 0.6565 and 0.6590 to be tested, followed by support near 0.6550. False breaks have been occurring on the topside, which may leave speculative short positions vulnerable on a squeeze higher.

Overall, AUD/USD is vulnerable to fickle swings in sentiment in this range trading environment.

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