EUR/AUD drops as risk assets rebound strongly

<p>Today’s disappointing US macro data has triggered a general “risk-on” response in the financial markets with the dollar falling and stocks rebounding as the probability […]</p>

Today’s disappointing US macro data has triggered a general “risk-on” response in the financial markets with the dollar falling and stocks rebounding as the probability of an interest rate rise recedes. This has benefited some buck-denominated commodities, like oil, copper and silver, which in turn have helped to underpin commodity currencies across the board. However, it remains to be seen if there is more drama on Friday in reaction to the US CPI inflation data.

Given the uncertainty about the US CPI, traders may prefer to play the strength of the commodity currencies against those where the central bank is still dovish, like the euro. One such pair is the EUR/AUD, which has fallen today even though the latest employment figures from Australia disappointed expectations overnight. When weakness in data fails to undermine a currency, this is usually very bullish (for the AUD in this case).

Indeed, the EUR/AUD is in the process of creating a bearish engulfing candle on its daily chart, which is obviously a bearish pattern as it shows a clear shift from previously buying to now selling pressure. The currency pair ran into strong resistance around the 1.5065-80 area today. Here, the 200-day moving average met the 161.8% Fibonacci extension level of the most recent downswing. In addition, price failed to hold its own above Tuesday’s high, thus forming a false breakout reversal pattern on the smaller time frames. Therefore, for as long as the EUR/AUD holds below this 1.5065-80 area, the near-term path of least resistance would be to the downside.

If the EUR/AUD now breaks and holds below the key short-term support at 1.4985 then it could lead to further follow-through in the selling pressure in the days to come. But the EUR/AUD has broken a bearish trend line already and also a key resistance area around 1.4890-4905. This area should therefore be watched closely for a potential bounce, though a break back below here would further strengthen the bearish argument.


Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.