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Euro Breaks Out, Australian Dollar Correction Underway

Euro Breaks Out, Australian Dollar Correction Underway

2011-02-09 16:40:00
David Song, Currency Strategist
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Euro_Breaks_Out_Australian_Dollar_Correction_Underway_body_ScreenShot004.png, Euro Breaks Out, Australian Dollar Correction Underway

Currency

Last

High

Low

Daily Change (pip)

Daily Range (pip)

EURUSD

1.3706

1.3721

1.3611

85

110

Euro_Breaks_Out_Australian_Dollar_Correction_Underway_body_ScreenShot002.png, Euro Breaks Out, Australian Dollar Correction Underway

The Euro broke of its recent range to reach a high of 1.3721 on Wednesday, and the single-currency may continue to retrace the decline from the previous week as it finds near-term support around 1.3500, the 50.0% Fibonacci retracement from the 2009 high to the 2010 low. The EUR/USD is 80+ points higher on the day after moving 76% of its average true range, but the two-rally rally could be short-lived as the relative strength index falls back from overbought territory. In turn, the euro-dollar may consolidate going into the Asian trade, and we may see the euro-dollar fill-in the gap from the 120-SMA at 1.3616 before the pair attempts to make another move to the upside. This could certainly turn out to be a great opportunity to fade the intraday rally, but we could be also seeing a head-and-shoulders pattern in the works given the bearish divergence in the daily RSI. As the near-term rally in the EUR/USD tapers off ahead of the 61.8% Fib around 1.3890-1.3900, the euro remains at risk for a sharp reversal as it appears to have carved out a top in February.

Key Levels/Indicators

Level/Indicator

Level

10-Day SMA

1.3678

20-Day SMA

1.3589

100-Day SMA

1.3537

Daily RSI

59

Upcoming Events

GMT

Importance

Release

Expected

Prior

9:00

MED

European Central Bank Monthly Report

--

--

Currency

Last

High

Low

Daily Change (pip)

Daily Range (pip)

AUDUSD

1.0120

1.0152

1.0093

26

59

Euro_Breaks_Out_Australian_Dollar_Correction_Underway_body_ScreenShot003.png, Euro Breaks Out, Australian Dollar Correction Underway

The Australian dollar pared the previous day’s advance, with the exchange rate slipping to a low of 1.0093, and the high-yielding currency may continue to retrace the advance from earlier this month as it appears to have carved out a near-term top in February. The AUD/USD remains 20+pips lower on the day after moving 56% of its ATR, and the selloff in the exchange rate may accelerate throughout the North American trade as investors scale back their appetite for risk. However, as employment in Australia is expected to increase 17.5K in January, the ongoing improvement in the labor market could produce a bullish reaction in the AUD/USD, which could lead the pair to make another run at 1.0200. Nevertheless, we are likely to see the Australian dollar face headwinds over the coming months as China tightens monetary policy to prevent the economy from overheating, and the Reserve Bank of Australia may talk down speculation for higher borrowing costs as the region copes with the slew of natural disasters paired with the slowdown in global trade. In turn, a drop in interest rate expectations should translate into further weakness for the Australian dollar, and the AUD/USD may fall back towards 0.9800 as the pair looks poised to retrace the near-term rally.

Key Levels/Indicators

Level/Indicator

Level

Resistance

1.0200

10-Day SMA

1.0069

20-Day SMA

1.0009

Support

0.9800

Upcoming Events

GMT

Importance

Release

Expected

Prior

0:30

HIGH

Employment Change (JAN)

17.5K

2.3K

0:30

HIGH

Unemployment Rate (JAN)

5.0%

5.0%

0:30

MED

Full Time Employment Change (JAN)

1.7K

0:30

MED

Part Time Employment Change (JAN)

0.6K

0:30

LOW

Participation Rate (JAN)

65.8%

65.8%

Join us to discuss the outlook for the major currencies on the DailyFXForums

To discuss this report contact David Song, Currency Analyst: instructor@dailyfx.com

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