The Australian dollar gapped higher at the open last night in response to news that the Liberal – National collation held onto power in the country’s elections over the weekend.

The center-right government, led by Scott Morrison, had been forecast to lose in the elections.

Morrison’s Party Hold onto Power

Morrison’s party had been trailing in the opinion polls. However, the Prime Minister’s campaign against the Labour opposition party proved to be successful.

Morrison attacked Labour over its plans to tackle climate change via higher taxation of wealthy Australians. His campaign was based around the government’s management of the economy which saw the longest streak of consecutive growth in Australian economic history. It included a long term budget surplus and tax cuts across the board.

Resurgent Trade War Concerns Blighting AUD

The AUD has been under heavy selling pressure over recent months. This is because of the resurgent US dollar and growing concerns over world growth as a result of the trade war.

AUD had been trading higher over March and April thanks to growing expectations of a US/China trade deal. The two leading global economies have been locked in trade negotiations since December. The negotiations aimed to end the year-long trade war which had marred world growth last year.

The trade talks initially had a deadline of March 1st, at which time Trump was to raise tariffs to 25% unless they reached a deal. However, no deal was reached and Trump extended the deadline due to the solid progress made. This boosted optimism around a potential trade deal.

Trump Announces Fresh Tariffs

However, a fortnight ago, the market was taken sharply by surprise as Trump announced that he was raising 10% tariffs on $200 billion of US goods to 25%. Trump noted that the Chinese were taking too long to agree on a deal and accused them of attempting to renegotiate terms. China then responded with its own retaliatory tariffs of 25% on $60 billion worth of US goods.

Trade War Concerns To Keep AUD Pressured

In light of this, the upside in AUD is likely to be short-lived. In fact, AUD bears will view it as a chance to reignite. AUD has fallen more than 2% against USD over the year so far.

The re-emergence of the trade war between the two leading global economies has raised word growth concerns again with risk assets falling consequently. News of fresh tariff action has now heightened expectations that the RBA will cut rates this year.

RBA Rate Cuts Expectations Grow

At its last meeting, the RBA slashed its growth forecasts for the year to June from 2.5% to just 1.7%. This led to a jump in market pricing for a rate cut this year.

Indeed, dissecting the bank’s own forecasts suggests that they are pricing in two rate cuts this year. The market is now pricing 60% probability of a rate cut by August. And further escalations in trade war tensions are likely to boost this pricing higher.

Technical Perspective

AUD/USD has seen a sharp recovery higher at the open of the week. It traded up to .6926 last following last week’s moves down to .6820s. However, the market is still well below the .6892 which is the key resistance now. While price remains below this level, the focus remains on further downside.

The lower time frames show that price has run into resistance at the .6933 level with the market currently printing a large bearish engulfing candle, signaling a potential end to the recovery. If we move lower from here, .6897 will be first support ahead of the gap close.