Australian Dollar Halts Slide, Euro Extends Decline

The Australia dollar halted the two-day decline and is the best performing currency against the greenback on Thursday following the rebound in risk appetite, but the overnight advance appears to be tapering off as the exchange rate fails to hold above the 100-Day SMA at 0.9041. The AUD/USD rose to a high of 0.9048 and remains nearly 40pips higher on the day after moving 85% of its ATR, but it seems as though the slightly weaker-than-expected data from the U.S. is dragging on investor sentiment as they weigh the outlook for global growth. The aussie-dollar has already filled in the gap from the 120-SMA at 0.8989 and may continue to retrace the overnight rally as the reserve currency benefits from the rise in safe-haven flows. As a result, we may see the pair maintain the tight downward trending channel from the January high (0.9331) ahead of  the Reserve Bank of Australia rate decision next Tuesday at 3:30 GMT. A Bloomberg survey shows 20 of the 21 economists polled forecast the RBA to increase the benchmark interest rate by 25bp to 4.00%, while investors are pricing a 78% chance for a quarter percent rate hike according to Credit Suisse overnight index swaps, and expectations for higher borrowing costs may lead the AUD/USD to retrace the decline from earlier this month as the central bank aims to normalize policy this year.

The Euro extended its decline from earlier week and remains the worst performing currency against the U.S. dollar after slipping below the 1.4000 level for the first time since July, and the single-currency may continue to trend lower going into the Asian trade as investors scale back expectations for a rate hike by the European Central Bank. The EUR/USD slipped to a low of 1.3938 during the overnight trade and remains nearly 60pips lower from the open after moving 56% of its average true range, but we may see a corrective retracement following the three-day decline as the daily RSI continues to push deeper into oversold territory. Meanwhile, the ECB is widely expected to hold borrowing costs at the record-low of 1.00% next Thursday, and is likely to maintain a dovish outlook for future policy as price pressures remain subdued, but hawkish rhetoric following the rate decision would push the exchange rate higher as the Governing Council aims to normalize policy this year.

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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com