FX.co ★ AUD/USD. Australian dollar is approaching an important support level

The AUD continues to decline and is heading sharply towards the key support level of 0.7000 against the US currency, showing a bearish mood. The USD, which has been rising in price for the second week throughout the market, is the reason why the AUD/USD pair is declining. However, the "Aussie" is also under pressure due to its own issues — the currency is getting cheaper, including in cross-pairs, such as AUD/JPY, AUD/NOK etc.). On the other hand, the recession in the commodity market and the ongoing political conflict between Australia and China played a role in reducing the "defenses" of the AUD. As a result, the traders of this pair have to obediently follow the dollar, which continues to gain impulse.

Considering the general mood of the market, we can conclude that it is only a matter of time before the "round" level of 0.7000 will be reached. But as for the future prospects of the downward movement, the intrigue remains here. The fact is that the level of 0.70 last year acted as a reliable level of support for many months. In the first half of 2019, bears permanently tried to go below this target for several months, but they came back each time. In the second half of last year, the situation took on a mirror image - the level of 0.7000 became a kind of price outpost, already acting as a resistance level. The AUD/USD bulls tried to approach the 70th figure more than ten times, but the price still declined below the "round" level in the end. In other words, this target has a special, symbolic meaning for the Australian currency.

This background suggests that an appropriate information is needed, so that the strong support level will be broken, and as a result, the sellers of AUD/USD will be able not only to impulsively break through 0.7000, but also to consolidate below, indicating further downward prospects. If the bears show their uncertainty in this price area, the support level can become a kind of flat for large-scale corrective pullbacks.

Today, the US currency is showing its creeping "offense". The current situation is basically different from the one that developed this Spring, when this pair broke through 100-150 points a day in favor of the dollar. Such volatility managed to throw off any barriers and support/resistance levels in their path. Now, there is nothing exciting for the dollar, so traders should be careful at the base of the 70th figure.

The dollar is growing due to two common factors. First, the coronavirus and second, hopes for agreeing on a new stimulus package for the US economy. The coronavirus factor recently played against the dollar, but now the situation has changed. Many countries around the world have recently tightened quarantine restrictions, which is in fact alarming for investors, given the weak pace of global economic recovery. Accordingly, the demand for the dollar as a defensive asset is growing.

The USD was also supported by political events in the United States. For months, Republicans and Democrats were unable to agree (and never did) a bill to help the US economy. But at the same time, we agreed on a draft law that would avoid the suspension of government work, which is quite unexpected and earlier than scheduled. In addition, the heads of the Federal Reserve and the Ministry of Finance spoke at the profile committee of the House of Representatives this week, who supported the interest in US assets. This led to the strength of the dollar and the stock market. Steven Mnuchin and Jerome Powell said during the hearing that the US economy is recovering "better than expected", but still requires support. Following the hearing, the Finance Minister told reporters that the White House is agreeing with congressmen on a bipartisan bill involving the allocation of additional financial incentives. And although he began to go into details, his speech was enough to make the dollar bulls to get excited.

In turn, the AUD is under background pressure from a number of fundamental factors. The information space is discussing again the disposition between Australia and China. The reason for this was the announcement that Beijing had banned entry to two Australian scholars for criticizing Chinese policies. In addition, the ABC broadcaster and the economic publication Australian Financial Review urgently recalled their correspondents in Beijing and Shanghai last week. According to some reports, they were threatened with arrest and charges of espionage. At the moment, there are no accredited journalists from Australia left in China. This fact is only a part of a bigger issue. Before that, there were economic sanctions, mutual accusations of cyber attacks and espionage, and the recall of students.

Technically, the Australian dollar is not pleased with the commodity market, while the price of Iron ore is declining amid rising inventories in Chinese ports. According to the latest data, stocks in 45 Chinese ports reached almost 120 million tons – an increase of 4% compared to the previous week. And compared to June, Iron ore reserves in China's ports increased by 10%.

Thus, the bears of the AUD/USD pair have the right to continue the downward trend up to the key support level of 0.7000 (which coincides with the middle line of the Bollinger Bands indicator on the weekly chart). However, the further bearish outlook looks unclear, so it is better to close short positions at the base of the 70th figure. In my opinion, the AUD/USD bears will be able to break through this target if there is strong news. For example, if Democrats and Republicans reach a compromise on an additional stimulus package.