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GBP/AUD spot rate at time of writing: 1.8247Bank transfer rate (indicative guide): 1.7608-1.7736FX specialist providers (indicative guide): 1.7973-1.8083More information on FX specialist rates hereThe Australian Dollar edged higher Tuesday in defiance of a short-term reversal signal on the daily charts and a wobble in gold prices, although the Euro's use as an instrument of Turkish economic coercion could drive additional upside given the Aussie's inverse correlation with the Dollar Index.

Australia's Dollar triggered a short-term reversal signal on the charts when it tumbled lower last Friday while a wobble in gold prices has helped to constrain the antipodean unit thus far in the new week, with both feeding analyst expectations of a correction lower.

"Friday produced a new 2020 high at 0.7243 before closing at 0.7157 and completing a bearish ST (daily) reversal pattern. Such a trigger implies that the uptrend has reached a point of short-term exhaustion," says David Coloretti at The Markets Academy, writing for NAB. "Risk is high for a short-term correction in the coming 1-2 weeks and a retest of medium-term support at 0.7032."

Above: AUD/USD rate shown at daily intervals alongside gold price (orange line, left axis).

Friday's bearish capitulation at more-than two-year highs came alongside a short-lived rebound in the U.S. Dollar Index and as the relative-strength-index measure of momentum again failed to confirm the new high plotted on the daily chart in a process known as 'bearish divergence'.

This bearish divergence is also a reversal signal that's encouraged technical analysts to sell AUD/USD in anticipation of a protracted correction, although some say the Aussie could retest last week's high before its next big leg lower.

"AUD/USD continues to hold over the 20 day ma at .7126 (only just!) but it is possible that it will test the 200 week ma at .7257 and the 55 month moving average at .7284. If seen, we would allow this to again hold as we note the diverging RSI," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank, who's a seller of AUD/USD from 0.7225. "Spot Gold has topped for now at 2072 and has eroded its accelerated uptrend. We would allow for a correction lower near term."

Above: AUD/USD rate shown at daily intervals alongside inverted Dollar Index (orange line, left axis).

Despite Friday's loss and the resulting bearish signals given off by the charts the AUD/USD faces upside risks in the days ahead given its strong negative correlation with the Dollar Index, which can be viewed by plotting the latter along an inverted scale on the charts next to AUD/USD.

The Dollar Index faces downside risks and EUR/USD as well as AUD/USD upside risks given that the Euro is increasingly being used as a conduit for market frustrations with the Turkish administration.

"Once the FX reserves run out, markets can get pretty volatile. For example, Turkey. President Erdogan declared yesterday that he wants further interest rate *cuts* and that “God willing, they will go down further,” as Turkey ‘flexed its military muscles’ (according to the press) and launched naval exercises off two Greek islands while announcing it will explore for energy in the area. That’s a move which could cause issues with any potential IMF bailout," says Michael Every, a global strategist at Rabobank. "TRY is at 7.32 today and while trade will stay choppy in the way CNY trading doesn’t, the risks are still of an ultimate move in the same direction – much lower."

Above: AUD/USD rate shown at daily intervals alongside EUR/USD (orange line, left axis).

Turkey's central bank has increasingly been seen as another arm of government under the current administration, one of the factors driving annual currency depreciations that average high double-digit percentages for the last decade. Recent lows are said to have resulted from failure of a CBRT mechanism which had temporarily kept the Lira stable against the Dollar.

The market has punished the Lira for a lengthy series of interest rate cuts made by a central bank that's widely perceived as politically compromised, but a meaningful depreciation requires a higher EUR/TRY and the most effective route to one of these is through a higher Euro-to-Dollar rate.

Mechanically, EUR/USD is one half of the relevant equation alongside USDTRY. Depreciation pressure can alternate between the two but makes a lower EUR/USD less likely without profit-taking by the market or intervention from Turkish authorities.

"Monetary policy in Turkey is too loose. In our view, the CBRT will ultimately have to hike rates dramatically. Although the FX interventions managed to keep USDTRY below 7 since May, this seems to have run its course," says Izidor Flajsman, an emerging markets strategist at TD Securities. "We expect at least 200bps of tightening of the one-week repo rate by end of Q3. The exact timing of this is likely to depend on TRY's performance. If TRY volatility continues, we could see even larger hikes which could happen sooner, rather than later."

Above: AUD/USD rate shown at daily intervals alongside EUR/TRY (orange line, left axis).

Lira losses could be a source of upside for AUD/USD because the Aussie rises whenever the Dollar Index falls and the stronger-for-longer EUR/USD required for a higher EUR/TRY is bad news for the Dollar Index.

The Euro accounts for almost 60% of flows measured by the Dollar Index, a number that rises comfortably above two-thirds when including the Pound, which is also important for Turkish trade and depreciation pressures.

The rub for Aussie Dollar bulls however, is that the bullish Euro consensus has had second thoughts about the outlook due to memories of 2018's depreciation, which produced some sharp falls in EUR/USD. Selling the Euro-to-Dollar rate would be for Turkish authorities, a more effective defence of the Lira than sales of USD/TRY. Such EUR/USD sales would weigh on EUR/TRY and furnish authorities with the Dollars required to subsequently suppress USD/TRY.

This could all make for a noisy and volatile summer among major currencies.

"The longer the CBRT runs down its reserves, the greater the upside risk for USD/TRY. The CBRT’s announcement on Aug 6 suggests the CBRT is moving closer to a rate hike, though we think TRY will need to selloff more before the CBRT pulls the trigger on an outright hike," says Daria Parkhomenko, a strategist at RBC Capital Markets, who forecasts USD/TRY at 7.60 in September and EUR/TRY at 9.04. "We have raised our USD/TRY forecasts higher due to the renewed pressure on TRY, but when TRY “breaks”/govt gives up on intervention, USD/TRY will significantly overshoot our profile."

NAB commentary provided by FXWatcher.com