The Australian dollar has been one of the heaviest sold currencies these past few months, owing to a combination of rate cuts by the Reserve Bank of Australia and fears of slowing Chinese and Australian economies. Despite the ongoing chaos that is the Eurozone, and despite the fact that the European Central Bank has also cut their interest rates, EUR/AUD has managed to rally from 1.2220 to a recent high of 1.4993 since late March, really demonstrating exactly how weak the Australian dollar has been. This represents a gain of over 2,700 hundred pips in a very short stretch of time, and as we know the forex markets rarely move in a straight line for very long. This past week we finally saw the Australian dollar begin to rally, both specifically against the EUR and also across the board. The most recent weekly candle in EUR/AUD was strongly bearish, and while it didn’t quite achieve “bearish engulfing” status, it does suggest that we are seeing the beginning of a much needed bearish correction in EUR/AUD.
As you can see from the weekly chart below, EUR/AUD formed an inverse head and shoulders pattern (a classic reversal pattern) off the 1.16 lows and rocketed higher from there. We have exceeded the typical measured move of such a pattern (measured by the yellow vertical line), adding further evidence to the case that a pullback is warranted.
If this is indeed the beginnings of a larger EUR/AUD correction, the first level that will have give way is the 1.44 figure, which as you can see from the daily chart, below, marks an importance confluence of trend-line and horizontal support. Below that level would mark a break of a trend-line that has lasted since early April, and would open up a move down toward the 50 day EMA (in red) which currently sits right below 1.42. On the other hand, if this is a brief correction in an otherwise strong uptrend; we should see the 1.44 level hold and the march higher to continue. Those who are already short EUR/AUD should probably hold their shorts and watch the 1.44 level for a reaction. Those who are looking to initiate new positions on this pair have two options. Those who believe the Australian dollar is doomed to continue lower should look to buy as close to 1.44 as possible, using a daily close below that key figure as their stop. Those who believe this is the beginning of a strong move higher by the Aussie (strong move lower by EUR/AUD) should look to short EUR/AUD on a daily break and close below 1.44, targeting 1.42 then 1.37 (the 100 day EMA). A move back above 1.44 after the break and close could serve as a stop.
Written by: Liam McMahon, Currency Strategist – GlobalFxClub.com