AUD/USD Forex Technical Analysis – January 4, 2016 Forecast

The AUD/USD plunged sharply lower in a matter of minutes early Monday in reaction to a steep sell-off in Chinese equity markets. The move was so severe that the Chinese government halted trading after stocks fell 7 percent in the wake of weaker-than-expected manufacturing data.

China’s official manufacturing Purchasing Manager’s Index (PMI), a measure of factory activity, stood at 49.7 in December, in line with market expectations. Conversely, the official non-manufacturing PMI was up 54.4, from November’s reading of 53.6. A reading below 50 indicates a contraction in activity on a monthly basis.

The selling pressure started after the Caixin December manufacturing PMI came in at 48.2 compared with 48.6 in November.

Additionally, before the markets opened, the People’s Bank of China set the yuan midpoint at 6.5032 against its previous fixing of 6.4936.

In other news, tensions are high in the Middle East as ties between Iran and Saudi Arabia continue to deteriorate, following Riyadh’s execution of a Shite cleric. Oil prices are up over 2 percent in the pre-market session in reaction to the news.

Technically, the main trend is up according to the daily swing chart, but the sharp break has turned the momentum down.

The main range is .7384 to .7096. After closing above its retracement zone at .7274 to .7240 on December 31, sellers came in today to drive the market to the bearish side of this zone, triggering the start of a steep sell-off.

The short-term range is .7096 to .7327. Its retracement zone at .72115 to .7184 is currently being tested. Since the trend is up, there may be a technical bounce on the first test of this area. If it fails then look for a further acceleration to the downside.

Based on the current price at .7222, the direction of the market the rest of the session is likely to be determined by trader reaction to the short-term 50% level at .72115.

A sustained move over .72115 will indicate that buyers have come in to defend the trend. The first upside objective is the major 50% level at .7240. Overtaking this level and holding the move could create enough upside momentum to challenge the major Fibonacci level at .7274 and a downtrending angle at .7289. The market could reverse up if .7289 is overcome with conviction.

A sustained move under .72115 will signal a resumption of the selling. The first downside target is an uptrending angle at .7196. This angle provided support earlier in the session when the AUD/USD plunged to its low at .7197.

Taking out .7196 will indicate that the selling is getting stronger with the next targets minor points at .7194 and .7184. Crossing to the weak side of these two levels will put the Forex pair in an extremely weak position with the next potential targets, uptrending angles at .7146 and .7121. The latter is the last potential support angle before the .7096 main bottom.

Watch the price action and order flow at .72115 the rest of the session. Trader reaction to this level will dictate the direction of the market into the close.