AUD/USD tests key resistance as US dollar drops to 2018 lows

Written by: Crispus Nyaga
December 2, 2020
  • The AUD/USD pair is close to a bullish breakout because of the weak US dollar.
  • The US dollar index slumped to the lowest level since 2018.
  • Australia's GDP bounced back by 3.3% after falling by 7% in the second quarter.

The AUD/USD price is up by more than 0.15% as a weaker US dollar converge with strong economic data from Australia. It is trading at 0.7382, which is a few pips higher than yesterday’s low of 0.7342.

AUD/USD
AUD/USD has been in an uptrend

US dollar slumps

The US dollar slumped in overnight trading as hopes of a new stimulus in the US and signs of a Covid vaccine pushed investors away from the greenback. Media reports suggested that Steve Mnuchin and Nancy Pelosi were in close agree a limited fiscal stimulus to support the economy.

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A stimulus is often viewed as being negative for the US dollar because it will reduce the overall risks of more contraction.

The dollar also declined as countries started preparing to issue Covid vaccination shots. That’s after major manufacturers, including Moderna (NASDAQ: MRNA) and Pfizer announced strong results on their vaccines.

Further, the dollar declined after the Institute of Supply Management (ISM) released the manufacturing PMI data. The PMI declined to 57.5 in November from the previous 59.3. That decrease was worse than the 58.0 that analysts were expecting.

The dollar index has dropped to $91.15, which is the lowest it has been since April 2018.

US dollar index has been on a freefall
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Australia economy bounced back in Q3

The AUD/USD is also rising because of the overall strong economic data from Australia. According to the statistics bureau, the economy rose by 3.3% in the third quarter after dropping by 7.0% in Q2. That happened as the country reopened and business activity rose.

This increase was mostly because of household consumption, which rose by 7.9%. Spending on services rose by 9.8% while goods rose by 5.2%. Cafes and restaurants performed well as restrictions eased.

During the quarter, employee compensation increased by 2.3% while household saving to income ratio fell to 18.9%. Capital expenditure fell by 0.1% as companies shifted to capital preservation.

The biggest laggard for the Australian economy was Victoria and Melbourne, which experienced a new wave in September. That led to a 9.8% contraction of Victoria’s economy.

AUD/USD technical outlook

AUD/USD
AUD/USD technical chart

On the daily chart, we see that the AUD/USD is just a few pips below the year-to-date high of 0.7411. The pair has also been on an upward trend after forming a double-bottom at 0.700 on November 2. The strong uptrend is supported by the short and longer-term moving averages. You can learn more about technical analysis in our free forex trading courses.

Therefore, like the EUR/USD has already done, there is a possibility that the pair will break-out and possibly reach 0.7450.