AUD/USD completes the cup and handle formation

Written by: Crispus Nyaga
February 19, 2021
  • The AUD/USD broke-out today after forming a cup and handle pattern.
  • The weak US dollar played an important role in this price action.
  • The strong flash manufacturing and services PMIs also contributed.

The AUD/USD made a bullish breakout today, helped by an overall weak US dollar and positive flash economic data from Australia. The pair rose to a near three-year high of 0.7835.

AUD/USD price action

Weak US dollar

The AUD/USD rose in part because of the weak greenback. The dollar index declined by more than 0.40% as investors continued to worry about inflation. The situation worsened yesterday when the US published worse-than-expected initial jobless claims numbers.

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As such, investors believe that Congress will rush to pass the $1.9 trillion stimulus package proposed by Joe Biden. As a result, this will lead to higher inflation, and force the Federal Reserve to hike interest rates earlier than expected. 

Meanwhile, signs of another stimulus have pushed commodity prices higher. The Bloomberg Commodity Index (BCOM) rose by 0.12% to $85.32 and is trading at the highest it has been since 2018. Commodities like copper, iron ore and crude oil have all risen to the highest level in more than a year. This is important for the AUD/USD because the Aussie is often viewed as a proxy for commodity prices.

Bloomberg Commodity Index
Bloomberg Commodity Index

The AUD/USD is also rising as forex investors react to the relatively strong economic numbers from Australia. According to Markit, the flash manufacturing PMI rose from 55.6 in January to 56.6. In the same period, the services PMI rose fell from 55.6 to 54.1. Still, with the two PMIs remaining above 50, it is a sign that the two sectors are expanding. 

The data came a day after the country reported mixed employment numbers. The economy added more than 29k jobs while the unemployment rate dropped from 6.6% to 6.4%. Also, data released today revealed that the country’s retail sales bounced back by 0.6% in January after dropping by 4.1% in December.

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AUD/USD technical outlook

AUD/USD price action

The four-hour chart shows that the Aussie broke-out higher today. Before this, the pair was forming a cup and handle pattern that is shown in black. In technical analysis, the pattern is usually a sign of bullish continuation. The price remains above the 15-day and 25-day exponential moving averages. Therefore, the pair will likely continue rising, with the next main target being at 0.800.