AUD/USD back above 0.7300 as dollar drop continues, eyes trendline resistance

• AUD/USD has topped 0.7300 in recent trade and is now looking to test uptrend resistance going back to November.
• The pair has been a beneficiary of recent USD weakness and may struggle to gain further should the dollar stabilise.

AUD/USD has in recent hours moved back to the north of the significant 0.7300 level and looks to be on course to mount a retest of an uptrend that has been capping the price action going all the way back to the end of November in the 0.7320s area. For now, at current levels in the 0.7310s, the pair is trading with gains of about 0.4% on the session, as dollar weakness provides ongoing tailwinds. The US dollar’s recent decline seems out-of-sync with recent fundamental developments, which most would normally interpret as USD bullish. These include the recent hawkish shift in Fed rhetoric towards accelerated tightening in 2022, last Friday’s tight labour market figures and Wednesday’s hot Consumer Price Inflation data.

On which note, the US inflation and employment stories received further input on Thursday in the form of Producer Price Inflation, which showed Core prices growth at a fresh record high (the data series started in 2011) above 8.0% YoY. The latest weekly jobless claims report, meanwhile, was mixed with a much larger than anticipated drop in continued claims and a fall in the insured unemployment rate from 1.3% to 1.1%, but a slightly larger than expected 230K initial claims on the week. The latter is perhaps indicative of the Omicron variant slowing the labour market, though is still in healthy pre-pandemic ranges (typically 200K – 250K).

Back to the dollar; recent downside thus appears to have its roots in position-adjustment (profit-taking on overcrowded long positioning), or a long-squeeze, rather than reflecting broader economic/central bank themes. That suggests that the dollar may soon bottom out. Gauging when exactly that will happen maybe a challenge, though technicians are suggesting the Dollar Index should find support in the mid-94.00s (it is currently around 94.70). That suggests further upside for G10/USD majors may be limited from here on out, suggesting AUD/USD may have a difficult time breaking above uptrend resistance and towards 0.7350.

Ahead, the main focus for FX markets on Thursday will be on Fed Vice Chair nominee Lael Brainard’s Senate hearing from 1500GMT and on any other Fedspeak. Fed members have recently been throwing support behind the notion of multiple rate hikes in 2022 and a potential beginning to quantitative tightening, as Fed’s Patrick Harker did earlier in the session.