AUD/USD Whipsaws on Revived Reflation Trade

AUD/USD PRICE OUTLOOK: US DOLLAR OSCILLATES AMID REFLATION TRADE HEADWINDS

• US Dollar finished Monday’s trading session roughly flat as bears look to fade recent strength
• DXY Index looks likely to surrender gains with the market embracing the reflation trade again
• AUD/USD price action whipsawed higher to probe trend resistance ahead of confidence data
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The US Dollar whipsawed lower on Monday as early upside fizzled out for the second consecutive trading session. An influx of US Dollar strength was seen at the APAC and European opens, but bears look to be fading the recent rebound. The broader DXY Index pivoted back below the 91.00-price level after erasing its 0.25% intraday gain and then some.

AUD/USD price action gained 26-pips while USD/CAD slid 16-pips. This rally across commodity currencies highlights a fresh breath of life to the reflation trade theme, which is could present considerable headwinds to the safe-haven US Dollar.

DXY – US DOLLAR INDEX PRICE CHART: DAILY TIME FRAME (09 OCT 2020 TO 08 FEB 2021)

Chart by @RichDvorakFX created using TradingView

US Dollar bears appear to have nullified the inverse head-and-shoulder pattern by reversing the topside breakout above the 91.10-price level. This brings to focus potential for continuation lower and poses the question whether or not it is time to fade the DXY Index rally. US Dollar demand has already started to ebb as suggested by the wilting relative strength index, but for now, the short-term bullish trend appears to remain intact. That said, it is possible we see an acceleration in US Dollar weakness if the 20-day and 50-day simple moving averages fail stymie selling pressure.

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USD PRICE OUTLOOK – US DOLLAR IMPLIED VOLATILITY TRADING RANGES (OVERNIGHT)

AUD/USD price action could benefit in particular on the back of the revived reflation trade and renewed US Dollar weakness. The latest bounce has pushed the Aussie to short-term trend resistance underscoring its stretch of lower highs over the last few weeks. Overcoming this technical obstacle could help the reflation trade theme gain traction and correspond with US Dollar selling pressure more broadly.

— Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight