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Euro, Pound Rally versus Commodity Bloc - EUR/AUD Breakout Looming?

Euro, Pound Rally versus Commodity Bloc - EUR/AUD Breakout Looming?

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- German PMIs beat, French PMIs miss, Euro-Zone PMIs flat.

- Slowing growth momentum confirms rationale for ECB’s 25-bps rate cut earlier this month.

- European currencies outperform higher yielding assets as taper talk weighs.

To keep up with the European data and news as the week goes forward, be sure to sign up for my distribution list.

Intraday Price Perspective

Note: I’ll be hosting a special strategy session on using the StrongWeak app to find short-term momentum opportunities with DailyFX Trading Instructor James Stanley today at 11:00 EST/16:00 GMT – register here.

Euro_Pound_Rally_versus_Commodity_Bloc_EURAUD_Breakout_Looming_body_Picture_1.png, Euro, Pound Rally versus Commodity Bloc - EUR/AUD Breakout Looming?

A scan of this morning’s best and worst performers via the Strong/Weak app shows that the commodity currencies – the Australian and New Zealand Dollars – are the worst performers over the past rolling 24-hour period. We note that momentum was particularly negative at the end of the US session yesterday and in Asia overnight as a result of the Federal Reserve’s October meeting Minutes.

If QE3 taper expectations are rising, price action today is suggesting that might be the likely policy course. From May through September, the European currencies, while moving sideways against the US Dollar, were able to post gains against the higher yielding currencies as the threat of diminished liquidity provoked a pullback in risk taking.

While the US Dollar is the top performer overall, it is difficult to ignore the resiliency in the Euro against the commodity currencies in light of Euro-specific developments over the past day, including speculation that the ECB could cut its main refinancing rate into negative territory. Accordingly, a more concerted move higher in EURAUD may be starting:


EURAUD H4 Chart: July 31 to Present

Euro_Pound_Rally_versus_Commodity_Bloc_EURAUD_Breakout_Looming_body_x0000_i1028.png, Euro, Pound Rally versus Commodity Bloc - EUR/AUD Breakout Looming?

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- After breaking the uptrend from the April, July, and August lows, the EURAUD has fallen into a sideways channel between A$1.4050 and 1.4560.

- The rebound off of channel support produced a bull flag on shorter-term timeframes (H1), suggesting continuation higher.

- A daily close above 1.4510 would suggest a breakout may be imminent; more confidence is gained on a daily close above 1.4560.

- Flag extension targets taken on H4 see a break of 1.4560 targeting 1.4586 (61.8% extension), 1.4752 (100% extension), and 1.5020 (161.8% extension, 2013 high).

- Stops should be held tight under the weekly low <1.4320.

Here’s a look at the data out of Europe this morning that’s influencing price action:


Euro_Pound_Rally_versus_Commodity_Bloc_EURAUD_Breakout_Looming_body_x0000_i1029.png, Euro, Pound Rally versus Commodity Bloc - EUR/AUD Breakout Looming?


Euro_Pound_Rally_versus_Commodity_Bloc_EURAUD_Breakout_Looming_body_x0000_i1030.png, Euro, Pound Rally versus Commodity Bloc - EUR/AUD Breakout Looming?


Euro_Pound_Rally_versus_Commodity_Bloc_EURAUD_Breakout_Looming_body_x0000_i1031.png, Euro, Pound Rally versus Commodity Bloc - EUR/AUD Breakout Looming?

--- Written by Christopher Vecchio, Currency Analyst

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.