AUD/USD: forecast following 8-year inflation high

Core inflation in Australia has reached its highest level in 8 years. What does this mean for the AUD/USD exchange rate?

Australian inflation data for December was just released in the previous Asian session - it showed that core inflation had reached its highest level since 2014. Rising inflation in advanced economies is no longer news.

A week ago, December data from the U.S. showed that prices for goods and services had risen the most in nearly four decades. It was 7% year-over-year, an incredibly high level for the U.S. Federal Reserve to fail to notice and act upon.

However, when trading in the currency market, both currencies must be considered as part of the exchange rate. While the U.S. dollar is relevant as the world's reserve currency, so is the Australian dollar.

In Australia, December inflation did not rise as much as in the US. Nevertheless, it reached an eight-year high of 3.6%.

Neither the Fed nor the Reserve Bank of Australia raised rates from their lower limits. However, they are both forced to do so.

Head and shoulders formation requires much lower levels

The bears have every reason to stay on the short side as a massive head and shoulders formation is visible on the daily chart. Currently, price is hovering above the neckline, seen at 0.70.

If the neckline gives way, the projected measured movement indicates a drop into the 0.6 area. However, this would only be the minimum distance the market would have to move to confirm the downtrend and attract more sellers.

Still, there are some drawbacks to head-and-shoulder patterns on such long time frames. One is that such a pattern is visible to all market participants; thus, its chances of "working" are rather slim.

A daily close above 0.75 invalidates the bearish scenario

While the bears seem to be in control, the bulls have some hope of a reversal. As long as price hovers above the neckline, nothing can be ruled out.

However, a true bullish reversal should only be considered on a daily close above the 0.7500 area. A move and close above the right shoulder highs would trigger further upside as traders will try to invalidate the bearish head and shoulders by pushing price back above the head.

Overall, the AUD/USD pair appears to be at a crossroads. With the decisions of both central banks weighing heavily, all eyes are on the two technical levels mentioned above.