Things seem to be going better for the Australian dollar. After plunging more than 10% last year, the AUD to USD exchange rate is experiencing a nice comeback. Australia posted a better-than-expected gross domestic product (GDP) report on Wednesday, which only added fuel to the fire. On the surface, everything looks great.
However, one indicator is saying that for the Aussie dollar, it won’t be just smooth sailing from here on. In fact, the AUD-USD could be running into a major resistance level.
Before we get into the details, keep in mind that the foreign exchange market is the largest financial market in the world in terms of volume. There are so many players, and so many forces that could affect the AUD/USD pair. Even the most seasoned traders can be humbled by the market.
Now, in case you haven’t noticed, Fibonacci retracements have worked wonders in the foreign exchange market. It is based on several key Fibonacci ratios that can be used to identify key levels of support and resistance, especially after a major move.
To be more specific, you draw a trendline between two extreme points and then divide the vertical distance by the key Fibonacci ratios. The ratios were amazingly accurate with the CAD/USD pair; this time they may just prove their value again with the Aussie dollar.
The chart below shows the downfall of the Australian dollar against the mighty greenback. Based on the swing high and the swing low, the 38.2% retracement level could become a critical resistance level. As you can see from the chart, the AUD/USD pair has reached the 38.2% horizontal line several times, but it didn’t manage to break above it.
Note that the 38.2% retracement level corresponds to an AUD to USD exchange rate of US$0.73. Today, the Aussie dollar surged to US$0.7285. Very soon, it could be touching that resistance level again.
Chart courtesy of www.StockCharts.com
The Bottom Line on the AUD/USD Exchange Rate
Of course, this doesn’t mean that the Australian dollar will stay down forever. There is still a chance that it could break above the resistance. Whether that would happen or not also depends on fundamentals. If there is more good news about Australia’s economy, and particularly about its exports sector, the AUD to USD exchange rate could go from retracement to a full-on reversal.