Yesterday, my colleague Kathleen Brooks discussed the bizarre breakdown in EURUSD. Despite broad-based USD weakness and a lack of negative news out of Europe, the world’s most widely-traded currency pair fell through a key support zone in the 1.3475-1.3500 area to hit a new yearly low. When a currency pair makes a surprising move with no obvious catalyst, it can mean one of two things: that the move is a temporary mispricing that will quickly reverse, or that the traders are anticipating new developments ahead of the headline writers. While we can’t be certain which of these situations will play out this time, the failure to bounce back today tilts the odds in favor of the bears for now.
Perhaps more importantly, the euro’s weakness has had a spillover effect into other pairs like EURGBP, EURJPY, and the focus of today’s note, EURAUD. Most currencies, including the euro, are under pressure against the Aussie today after last night’s hotter-than-expected inflation reading Down Under. In fact, the EURAUD is currently trading at a new 2014 low as of writing, and the technical evidence suggests rates may fall further before finding any support.
Most immediately, rates put in a large Bearish Engulfing Candle* yesterday; this candlestick pattern shows a shift from buying to selling pressure and points to continued weakness in the days to come. More broadly, the pair continues to put in lower lows and lower highs on the daily chart, finding resistance at the 50-day MA. As long as this phenomenon remains in place, the path of least resistance will be to the downside. The secondary indicators bolster the bearish case. The RSI remains mired in bear territory (< 60), while the MACD has turned lower once again after failing to reach the key 0 level on the most recent consolidation.
Looking ahead, EURAUD may find a modicum of support at the bottom of its falling wedge pattern around 1.4160, but aggressive bears are already starting to turn their eyes toward the 1-year low at 1.4050. Either of these levels could serve as near-term targets for bearish traders. Meanwhile, only a break above the upper trend line and 50-day MA around 1.4500 would erase the current bearish bias.
*A Bearish Engulfing candle is formed when the candle breaks above the high of the previous time period before sellers step in and push rates down to close below the low of the previous time period. It indicates that the sellers have wrested control of the market from the buyers.
Source: FOREX.com
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