Currency Spotlight: AUDUSD Weak after Fed Rate Rise

The currency in the spotlight is AUDUSD. Last week the Federal Reserve raised interest rates and the Australian Dollar rallied against the US Dollar on the news.

AUDUSD 1-hour chart

The chart above shows a widespread up bar on the interest rate news. The bar closed in the middle of the range. The volume was ultra-high and it was the highest volume on the chart for some time. The very next bar was a down bar also on ultra-high volume.

There are two rules in volume spread analysis:

  1. When weakness appears it appears on widespread up bars with ultra-high volume.
  2. When strength appears it appears on widespread down bars with ultra-high volume

We see both bars here but the Australian dollar rallies when the very next bar is a down bar on very low volume. A VSA principle appears, “No Supply” and causes the currency to rally. It rallies to the highs of the wide-spread up bar and the volume at that resistance point is significantly lower. The bar that rallies and closes on the lows tells us the market is most likely will rollover.

The market drops toward the trigger point and the trend changes to the downside. The first break of the trigger point was a false breakout. The market rallies back up through the trigger point on lowering volume which confirms that the currency is weak. From the highs of the wide spread up bar, we are seeing lower highs which is exactly what we need to see weakness.

For the second time, the price broke through the trigger point on increased volume and drops significantly. Strength enters the market when a “Simple Test” appears at the lows and then the market begins its retracement.

When the price breaks our trigger point, we will then wait patiently for a sign of weakness and the retracement in price gives us a sign of weakness, “Weakness has appeared”. Also what confirms this high probability trade setup is the decrease in volume as the market rises.

Now we’ll have to wait and see what the currency does when the market opens on Monday, but this is the sort of setup that I wait for time and again.