AUD/USD Trapped in Lateral Channel, US CPI Could Spark Volatility Later this Week

Since early March, AUD/USD has demonstrated a lack of definitive directionality, trading predominantly in a horizontal pattern. The exchange rate has consistently remained within the parameters of a lateral channel, indicating a period of consolidation prior to an anticipated significant shift in value.

The predictability of volatile markets can offer opportunities for profitable trading. The strategy involves purchasing long positions when the underlying asset’s price approaches a support level in anticipation of a rebound, or selling short positions at the resistance level to prepare for a potential pullback.

Based on the daily chart of the Australian dollar, implementing range trading tactics would have been advantageous owing to the pair’s adherence to the upper (0.6800) and lower limits (0.6500) of its range-bound movement for over two months. Despite the potential success of this approach, prudence is recommended as heightened volatility is anticipated in the upcoming days due to a significant economic event on the calendar, namely, the release of April’s U.S. Consumer Price Index report.

The upcoming release of U.S. inflation data on Wednesday at 8:30 am ET has the potential to cause significant fluctuations in the foreign exchange (FX) market. As such, it is advisable for traders to approach trading with caution and closely monitor price movements in order to accurately anticipate short-term market trends.

Possible scenarios for AUD/USD include rejection from resistance at 0.6800. If this occurs, the 200-day simple moving average and the rising trendline extended off the October 2022 lows may provide support against bearish activity. However, if these levels are decisively breached, sellers may be emboldened to target the 2023 lows near 0.6575.

In the academic context, it is possible for price action consolidation to result in an upward trend if resistance at 0.6800 is cleanly broken. The emergence of additional buyers could create favorable conditions for a rally towards 0.6880. Furthermore, if the trend continues to strengthen, attention may shift to dynamic resistance at 0.7000.