The Australian dollar has been on a recovery path since hitting a multi-year low of 0.6547 in December 2022. However, the currency pair faces a major hurdle as it enters the first quarter of 2023: the key resistance level of 0.7000. This level has acted as a pivot point for AUD/USD since 2018, and its fate will likely determine the direction of the pair for the next few months.
The 0.7000 level is not only a psychological barrier, but also a technical one. It has been tested several times as both support and resistance in the past four years, and each time it has resulted in a significant reversal or consolidation. The chart below shows some of the most notable examples of how 0.7000 has influenced AUD/USD.
As you can see, 0.7000 has been a turning point for AUD/USD in both bullish and bearish scenarios. The most recent test of this level occurred in December 2022, when AUD/USD bounced off 0.7000 after a prolonged downtrend. This suggests that the level still holds a lot of significance for the market, and that breaking it would require a strong catalyst.
What are the factors that could drive AUD/USD above or below 0.7000?
There are several factors that could influence the direction of AUD/USD in Q1 of 2023, but the most important ones are:
- Inflation and monetary policy: The main driver of the AUD/USD downtrend in 2022 was the divergence between the monetary policies of the US and Australia. The Federal Reserve adopted a hawkish stance to combat rising inflation, while the Reserve Bank of Australia maintained a dovish outlook amid subdued price pressures. This widened the interest rate differential between the two countries, making the US dollar more attractive than the Australian dollar. However, in Q1 of 2023, this gap could narrow if inflation in Australia picks up and the RBA signals a more hawkish tone. Conversely, if inflation in the US moderates and the Fed pauses its tightening cycle, the US dollar could lose some of its appeal.
- Risk sentiment and global growth: The Australian dollar is considered a risk-sensitive currency, meaning that it tends to benefit from positive developments in the global economy and financial markets. In 2022, the AUD/USD pair was weighed down by concerns over the COVID-19 pandemic, the slowdown in China, and the trade tensions between the US and its allies. In Q1 of 2023, these factors could either ease or worsen, depending on the progress of the vaccination campaigns, the reopening of the economies, and the resolution of the disputes. A more optimistic outlook for the world growth and trade could boost the demand for the Australian dollar, while a more pessimistic scenario could dampen it.
- Commodity prices and the Chinese demand: The Australian dollar is also influenced by the prices of the commodities that Australia exports, such as iron ore, coal, and gold. These commodities are largely driven by the demand from China, which is Australia’s largest trading partner. In 2022, the AUD/USD pair suffered from the decline in the commodity prices, as China faced a slowdown in its industrial activity, a power crisis, and a regulatory crackdown. In Q1 of 2023, the commodity prices could recover if China manages to overcome its challenges and boost its consumption. Alternatively, the commodity prices could fall further if China faces more headwinds and reduces its imports.
How to trade AUD/USD in Q1 of 2023?
Given the importance of the 0.7000 level for AUD/USD, traders should pay close attention to how the pair reacts to this level in Q1 of 2023. A clear and sustained break above 0.7000 could signal a bullish reversal and open the door for further gains towards the next resistance levels of 0.6916, 0.6800, and 0.7000. A failure to break above 0.7000 could indicate a bearish continuation and trigger a sell-off towards the next support levels of 0.6700, 0.6641, and 0.6585.
The chart below shows the potential scenarios for AUD/USD in Q1 of 2023, based on the 0.7000 level.
Traders should also monitor the factors that could drive AUD/USD above or below 0.7000, such as the inflation and monetary policy data, the risk sentiment and global growth indicators, and the commodity prices and the Chinese demand figures. These factors could provide clues about the strength or weakness of the AUD/USD pair, and help traders to identify the best entry and exit points for their trades.
