AUD/USD. US dollar stays subdued as Democrats propose unsustainable bill

As expected, the support level of 0.7000 was too strong for the AUD/USD bears. Despite a short decline in price, the general strengthening of the American currency and the decline in the price of iron ore, the Australian dollar managed to withstand the bearish momentum and held near the key target. By the way, the AUD/USD bulls were trying to break through the 0.7000 mark for two months this summer when it served as a resistance level. At the moment, the situation is just the other way round. The bears failed to break through the area of 69. After reaching the level of 0.7007, the price reversed and headed to the upside.

The price was mainly driven by two factors. First, the US dollar's rise has slowed down. The US dollar index is stuck in the range of 94.1-94.5, waiting for additional drivers that would strengthen the greenback's position. However, the US dollar entered a flat channel amid a lack of such drivers. As a result, many currency pairs developed a correction. Secondly, as mentioned above, the bears need a strong driver to break through the 0.7000 mark. Besides, the price needs to break through the key level of support and consolidate below it. However, at the moment nothing in the fundamental background can cause such price movements.

Notably, the AUD/USD pair's trajectory is mainly determined by the American currency. The Australian dollar is almost never a leading currency in this pair. The pair only reacts to major macroeconomic releases from Australia and to political statements or decisions related to the protracted conflict between Canberra and Beijing. The aussie also reacts to the news regarding the coronavirus rate in Australia in the context of strengthening or weakening the restrictive lockdown measures in the country. In general, however, the US dollar sets the tone for trading. For example, buyers of AUD/USD were able to overcome the 0.7000 mark later this summer only due to the overall depreciation of the greenback. All other events such as the RBA's wait-and-see attitude, improvement in the Australian labor market, and the rise in inflation rate served as minor supportive factors.

Therefore, at the moment, the prospects for the AUD/USD downtrend will primarily depend on the greenback's trajectory. Moreover, this week, the economic calendar is almost empty for the Australian currency as all major releases were published in early September.

The US currency has actually come to a halt amid conflicting fundamental signals. For instance, last week the US House of Representatives approved a stimulus bill that helped avoid the shutdown. This fact made it possible to assume that congressmen will be able to find a common ground on additional incentives. Against this background, the US dollar was actively extending gains and tested multi-month highs. The US dollar index was last seen at such levels in late July. Moreover, US Secretary of Treasury Steven Mnuchin said that the White House is consulting with congressmen to come up with a bipartisan bill that will be supported by both Democrats and Republicans in both houses of Congress.

However, at the end of last week, Director of the National Economic Council Larry Kudlow said that the American economy does not need another emergency stimulus package. In his opinion, targeted measures are still useful, but there is no need for another massive multi-trillion dollar package. Following this statement, the US dollar stopped rising yesterday. Market participants became doubtful that the parties would reach a compromise in the near future, at least before the presidential elections.

This skeptical mood among traders has intensified this week. Yesterday, the House of Representatives unveiled a draft law which ensures additional financial aid to American businesses and citizens during the pandemic in the amount of $2.2 trillion. Democratic lawmakers, who control the majority in the Lower House of Congress, proposed this bill. The new coronavirus relief package is $1.2 trillion less than the previous proposal. Apparently, this bill may face the same situation: it will certainly be passed in the House of Representatives, but it will most likely be rejected by the Senate the majority of which are Republicans. Republicans believe that the amount of the new stimulus package is way too much. Moreover, Trump warned several months ago that if the multi-trillion-dollar bill is still passed, he will use the presidential veto, blocking its signing. In turn, representatives of the Democratic Party in early September rejected the legislative proposal of Republicans. They believe that the $300 billion bill is scanty and not enough to serve as a comprehensive aid.

Thus, last week, traders still hoped that negotiations between Republicans and Democrats will have a positive outcome. The US Treasury Secretary fueled these hopes and sparked a high interest in the US currency. However, this week it became clear that the parties are still stand their ground. Democrats introduced a bill worth $2.2 trillion, while the White House says that the "giant" aid package is not needed. Against this controversial background, the US dollar suspended its uptrend and paused in anticipation of the next information drivers.

Given the current fundamental picture and a strong support level at 0.7000, we can assume that the AUD/USD pair will continue its upward correction. Long positions in the medium term should be set with the target at 0.7150. This is the upper boundary of the Kumo Cloud which coincides with the Tenkan-Sen line on the daily chart.

The material has been provided by InstaForex Company - www.instaforex.com