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AUDUSD Gaps Lower on US-Iran Conflict, Drops on Caixin Services PMI

AUDUSD Retreats as Bears Control the Game

Unlike its European counterparts like the euro or the pound, the Aussie started today’s trading with a weekend gap. After closing at 0.6948, the currency pair opened at 0.6939 today as concerns about the geopolitical crisis between the US and Iran continued to weigh down sentiment. Of course, it also did not help that economic data from China missed forecasts.

US-Iran Conflict: Updates

The biggest event risk for financial markets in the coming days or weeks is the ongoing conflict between the US and Iran. On Friday, risk currencies like the Aussie, sold off aggressively as news that the US killed Iranian General Soleimani sparked risk aversion. He was a key military figure in the Middle East and the Iran government has warned against retaliation against the US.

The good news is that Iran has not taken aggressive measures for revenge against the US… just yet. This may have allowed AUDUSD to fill its weekend gap quite quickly after today’s market open. However, it does not mean that Iran has let bygones be bygones.

General Qasem Soleimani who also headed Iran’s elite Quds Force has been replaced by Esmail Ghaani. He has been a long time deputy of the deceased general and has been on the US’ list of sanctioned personnel. In an interview, he promised to retaliate against the US. In fact, Iran has already announced an $80-million bounty for the head of US President Trump!

Central bankers have already expressed their concerns for developments in the Middle East. BOJ Governor Kuroda has warned to remain vigilant about the ongoing tensions. Meanwhile, US Congress will be attempting to keep Trump from further escalating tensions. US House Speaker Nancy Pelosi said that Congress will pass on the War Power Resolution. This bill will limit Trump’s military actions against Iran.

Caixin Services PMI

It also did not help the Aussie data data from China missed forecasts. The Caixin Services PMI report for December came in at 52.5. Although the reading is higher than the 50.0 baseline figure which indicates expansion, it missed the market’s 53.2 forecast. This was bearish for the Aussie because it suggests that growth in the services sector of its largest trading partner could be slowing.

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AUDUSD Outlook

On the 15-minute chart, we can see that AUDUSD has been making lower highs and higher lows. In fact, when you connect them, a symmetrical triangle becomes apparent. In forex trading, this chart pattern is often interpreted as a neutral chart pattern. It hints that buyers and sellers have an equal chance of dictating direction.

A breakout above today’s Asian session highs at 0.6954 could mean that buyers are in control. You could then want to look at the 200 SMA for resistance around 0.6970. On the other hand, a downside break or a close below today’s low at 0.6931 could mean that AUDUSD is headed to 0.6910. This price coincides with the rising trend line and previous highs that I pointed out on the daily chart last weekend.