EUR AUD drops as risk assets rebound strongly

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.