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  • AUD/JPY consolidates as markets in wait-and-see mode with respect to Iran/US tensions. 
  • AUD/JPY supported in a rising bearish wedge, fragility in play on fundamentals. 

While the world is watching for Iran’s response, which many fear could trigger an escalation in tit-for-tat aggression, risk FX, such as AUD/JPY being the market’s main barometer, will be volatile on rumours and headlines.

We have seen a range since the start of the year between 76.24 and a low of 74.73. For the start of the week in European and US markets, the cross has stuck to a tighter range of between 74.73 and 75.20. The price has morphed into consolidation as the US dollar firms a touch, both oil and gold gave back some ground and US stocks have firmed on their lows, albeit pressured in slightly negative territory following October’s bull run to record highs.

Waiting for a consensus over the geopolitics between the US and Iran

It would seem that the markets can’t find a consensus over the geopolitics between the US and Iran. Deescalation has been the word on the street since European leaders have tried to mediate. However, markets will remain on tenterhooks and the overshoot in prices, now correcting, could be a sign of greater moves to come. Taking gold, for example, we can expect an asymmetric response from the Federal Reserve to higher US inflation and inflexion in both the global economy and global geopolitics. While the cross, AUD/JPY, is not necessarily correlated to the yellow metal, it will be adversely affected by the same mentioned scenario. 

Looking into the near future in geopolitics, we have the Middle Eastern crisis, the threat of terrorism rearing its very ugly head again, US/Sino trade relations and potential tough trade negotiations between Europe and Great Britain, all for which have the potential to send the cross over a cliff.

AUD/JPY levels

The cliff, just mentioned, is composed of, namely the 200-day moving average where it meets the 23.6% Fibonacci retracement of the 2019 range as first support in the first instance ahead of the June lows and confluence of the 38.2% Fibonacci (2019 range) down at 74 the figure and 73.80. A great support barrier (since GFC 2009) that WILL be targetted on a catastrophic risk-off event will come in at the 61.8% Fibonacci (2019 range) between 72 the figure and 72.50. 

While fundamentals could switch on a de-escalation of the threat of war, the technical picture on the long term charts (rising bearish wedge in a broader downtrend) should be troubling for committed bulls. On the other hand, there are still upside potentials within the pattern so long as the currency support holds. A bullish correction will open 76 the figure, 76.20 and 77.20/50 and the 21-month moving average as the summit of the rising wedge formation.