Interest Rate Cuts and AUD/USD

12/19/2008 10:56 am EST

Focus: FOREX

(Price on 1st pane, Slow Stochastics on 2nd pane; downtrend line in red; uptrend line in green; horizontal support/resistance lines in yellow; chart pattern in magenta; 50-period simple moving average in light blue.)

With the recent US Federal Reserve rate cut to a record low, the interest rate differential between AUD and USD has widened to a substantial 4.00%. As shown on the accompanying AUD/USD daily chart, this expanded differential has helped contribute to a significant rise in the exchange rate. After having broken out above a prolonged triangle consolidation (in magenta), which acted as a support base for the pair, price has gone on to break out tentatively above the key 0.7000 resistance level, as well as an important downtrend resistance line (in red).

This has fueled speculation of a potential bona fide trend reversal in the pair, much like what currently appears to be occurring in other dollar-based pairs. If AUD/USD indeed jumps on the current dollar-weakening bandwagon with further bullish price action, the next major resistance to the upside resides around the 0.7250 region. In the event of any significant breakout above that level, price could eventually target the lofty 0.7700 level, a significant prior support/resistance level.

By James Chen, Chief Technical Analyst, FX Solutions

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