EUR/AUD: Bear Flag Intact for ECB Draghi's Press Conference

Euro pairs are in a state of flux with ECB President Mario Draghi set to take the stage for the ECB press conference. As my colleague Kathleen Brooks outlined earlier today, Draghi will likely leave the door open for additional easing from the bank while simultaneously explaining why the bank made no changes earlier today. Though “Super Mario” is experienced in these types of high-pressure situations, any small slip-up could lead to a rapid reaction in the Euro.

Last week we highlighted a confluence of bearish technical indicators, including multi-month Head-and-Shoulders pattern, on EUR/AUD (see below). The convergence of different signals suggested that a major top could be forming following the break of key support in the 1.5000-25 zone. Revisiting the EUR/AUD today shows that rates have generally consolidated for the past 5 trading days, but the unit still remains below the key 1.5000-25 resistance zone.

In fact, the recent price action may be seen as a bearish flag pattern within the recent downtrend that dates back to early March (see 4hr chart below). This classic price action pattern is created by a sharp drop lower, followed by a shallow, controlled pullback. If confirmed by a break and close below the bottom of the flag, this pattern points to a strong bearish continuation. Thus far, bounces have been limited to the shallow 23.6% Fibonacci retracement, suggesting sellers remain generally in control of trade; this view is confirmed by the RSI, which remains below the key 60 level that typically delineates downtrends from uptrends.

If we do see a bearish break later today or this week, a retest of the 4-month low and 200-day MA near 1.4775 is likely, followed by a potential continuation to the 38.2% daily Fibonacci retracement near 1.4500 (not shown). On the other hand, if Draghi strikes a hawkish tone, a rally through the top of the flag pattern at 1.4955 is possible. A conclusive break back above the previous neck line in the 1.5000-25 zone would eliminate the bearish bias in the pair.