AUD/USD retreats after a sharp reversal of iron ore prices

By: Crispus Nyaga
Crispus Nyaga
Crispus is an active trader, where he is followed and copied at Capital.com. He lives in Nairobi with his… read more.
on May 14, 2021
  • The AUD/USD pair is under pressure after iron ore prices retreated.
  • The prices of iron ore fell by 10% after reaching to an all-time high.
  • The pair will react to the upcoming US retail sales numbers.

The AUD/USD pair is hovering near its lowest level since Tuesday last week after the sudden meltdown in commodity prices. The pair is trading at 0.7730, which is a few points above this week’s low of 0.7690.

Australian dollar
Australian dollar price action

Commodity prices retreat

The Australian dollar is one of the most popular commodity-linked currencies in the world. This is mostly because of the vast amount of commodities Australia sells every month to countries like China. Therefore, in most periods, the AUD/USD tends to rise when commodity prices are rising as well.

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Earlier this week, the price of iron ore surged to an all-time high as demand from China continued to rise. However, the situation changed in the past two days. Yesterday, the price fell by almost 10% as some analysts started to question the strength of the rally. The Chinese state council also seemed to intervene in the market in order to ensure the stability of the market.

The decline of steel prices was also attributed to the rising consumer and producer prices in the United States. On Wednesday, numbers showed that the headline CPI rose by 4.2% in April, the highest level since 2008. And yesterday, data revealed that the headline PPI rose by 6.2%. 

These numbers affect commodity prices indirectly. For one, they raise the possibility that the Federal Reserve will hike interest rates earlier than expected. This, in turn, leads to a stronger US dollar and weaker prices. 

The AUD/USD is also reacting to the relatively weak Australian home sales numbers. According to HIA, home sales declined by more than 50% in April as house prices rose. This was a sharp reversal after the home sales jumped by 90.3% in March. Still, the Australian dollar is recovering faster than expected.

Later today, the pair will react to the latest US retail sales numbers. The data are expected to show that sales rose modestly in April after booming in March due to the stimulus package.

AUD/USD technical analysis

Rolls-Royce share price
AUD/USD price action

The four-hour chart, the pair is attempting to bounce back after falling to 0.7690 earlier this week. The pair has managed to move above the lower side of the previous horizontal channel. It is between the 50% and 38.2% Fibonacci retracement level while it remains below the 25-day and 50-day moving averages. It has also broken below the head and shoulders pattern that was forming a few days ago. Therefore, the pair may resume the downward trend as traders target the 61.8% retracement at 0.7666.

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