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AUD/USD testing long-term resistance after recent rally

The recent AUD/USD rally has pushed back against long-term resistance and will now need a clean break to keep moving higher.

A combination of US dollar strength and Australian dollar weakness has seen AUD/USD make a series of lower highs over the last ten months, highlighting the ongoing weakness of the pair. The recent rebound has pushed the pair back up to one important longer-term indicator that it has tried and failed to break this year.

Historic low interest rates weigh on the Australian dollar

The Reserve Bank of Australia (RBA) has cut interest rates three times this year to a historic low of 0.75% from 1.50%. The central bank lowered rates to help boost domestic inflation and growth and to help the country reach full employment. While employment has picked up, inflation and consumer spending remain below target and market expectations are for lower rates for longer with the potential for a further 0.25% rate cut in January 2020. This interest rate backdrop will continue to weigh on the Australian dollar in the months ahead.

The US has also cut interest rates three times this year, to 1.75% from 2.50%, and recently said that it would also remain data dependent before making another move.

While the differential between the two currencies interest rates remains the same, the Australian dollar has been hurt by the ongoing US-China trade war, while the US dollar has picked up a slight bid, remaining the ‘cleanest shirt in the laundry basket’ when looking at G10 currencies.

AUD/USD technical analysis

The daily AUD/USD price chart shows a series of long-term ‘lower highs’ that have all been contained by the 200-day simple moving average (SMA). Any short-term break higher has been reversed quickly and this longer trend remains dominant for now.

To break this downtrend, AUD/USD would have to break, and close, the 200-day SMA (currently at $0.6919) and the $0.7082 lower high made on 18 July this year. A failure to do both would leave the long-term downtrend in place.

If the 200-day SMA continues to act as resistance, then downside targets would include a congested area of recent lows and both the 20 and 50-day SMAs, between $0.6812 and $0.6847, before a medium-term attempt at $0.6671. A break below here would see AUD/USD at its lowest levels since March 2009.

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