Oversold US dollar threatens strong correction in AUDUSD

At the opening of Tuesday's trading session, the AUDUSD currency pair updated its mid-December high and then began to consolidate at the reached levels. The Australian dollar rally against the greenback continues for two weeks now, and there has not been any notable correction yet. The temptation to take at least part of the profit on long positions is getting stronger, especially since the technical picture indicates that AUDUSD is clearly overbought. In case of a pullback, the bears will target the level of 0.633. 

According to Bloomberg, an increasing number of market participants consider the scale of the US dollar collapse to be excessive. The dollar index fell below 100, which also occurred in July 2023 and September 2024. Both drops were followed by a strong uptrend that completely offset all previous losses. It was fueled by a large-scale short squeeze, with short positions now estimated at $40 billion, the biggest since October.

Additionally, the Federal Reserve’s (Fed) statistics cast doubt on a massive flight from the US currency. While individuals and private companies have shifted to other assets, governmental institutions continue to invest in US securities. Over the past 2 weeks, non-resident institutional investors have bought another $10 billion dollars worth of Treasuries. Trump’s pressure on the Fed chair is largely offset by still-high US bond yields.

Despite the worries surrounding the independence of the US central bank, traders are still not pricing in a rate cut at the meeting on May 7. Meanwhile, the Reserve Bank of Australia (RBA) is expected to ease monetary policy next month. James McIntyre, an analyst at Bloomberg Economics, projects three more interest rate cuts by the RBA by the end of the year, although markets are gradually boosting bets on four cuts. This is set to weaken the Aussie and support the AUDUSD correction.

The Stochastic oscillator has signaled a downward reversal. The nearest target for AUDUSD sellers will be the level of 0.633.

Consider the following trading strategy:

Sell AUDUSD at the current price. Take profit – 0.633. Stop loss – 0.65.