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Euro Price Action Setups: EUR/USD, EUR/JPY, EUR/AUD

Euro Price Action Setups: EUR/USD, EUR/JPY, EUR/AUD

James Stanley, Senior Strategist

Euro Talking Points:

  • The Euro has shown strength over the past month as expectations have built for the ECB to begin to shift away from their uber-accommodative monetary policy.
  • The European Central Bank meets this Thursday and the big question is how quickly the ECB will move as inflation remains high and warning signs are showing after the Federal Reserve avoided hiking to contain inflation last year. The bank will release updated projections at this meeting that will provide clue as to whether the ECB is open to a 50 basis point move in July.
  • The analysis contained in article relies on price action and chart formations. To learn more about price action or chart patterns, check out our DailyFX Education section.

The European Central Bank meets for a rate decision this Thursday and the big question is how quickly the ECB will look to hike rates in the effort of buffering inflation. With inflation in the Euro-zone crossing 8%, the motivation has begun to build for the Central Bank to move away from the easy-money policies that have become commonplace in the bloc. And just across the Atlantic exists a cautionary tale of a Central Bank that avoided hiking as inflation climbed; and while the Fed had the constant excuse of the labor market recovery to hold them back, the ECB and their single mandate of controlling inflation don’t have such a luxury.

For its part, the single currency has been gaining against most currencies over the past few weeks. EUR/USD bottomed just above the 19-year low at 1.0340 on May 13th and the back-half of the month saw the pair gain more than 400 pips on its way up to resistance. Given the ongoing strength of the US Dollar, this is really saying something as the Fed is widely-expected to hike rates quite a bit more this year, with another 50 basis points coming next Wednesday.

But, in the ECB, there’s a lot left to price-in as the inflation picture in Europe has started to resemble that of the U.S.. In Europe, there was hesitation to hike as one of the factors contributing to that inflation was a war on the continent’s Eastern border – a war that threatened to bring some adverse economic impact along with even more inflation. And that puts the ECB in a difficult spot as hiking could only increase the pressure on those areas of the European economy but, given the continued rise in inflation it’s looking more and more like the bank has little choice in the matter.

In the major of EUR/USD, the pair still holds some bullish potential, largely rooted from last week’s bounce of support at prior resistance. This is taken from a zone running from 1.0593-1.0638 and that area caught a bounce on Wednesday that held into the end of the week. That bounce found lower-high resistance in the same zone that caught the prior high, plotted from around 1.0767-1.0787.

While this could carry some bullish potential, there may be more amenable areas for that elsewhere which I’ll look at after our next chart. But, on this setup, the area of focus is that support zone running from 1.0593-1.0638. If sellers can punch through that, then the door re-opens for bearish scenarios in the pair, looking for a return to the 1.0500 psychological level.

EUR/USD Daily Price Chart

EURUSD daily price chart

Chart prepared by James Stanley; EURUSD on Tradingview

EUR/JPY

While the US is similarly on the track to hike rates, the Bank of Japan doesn’t appear to be nearing such a scenario anytime soon. The Yen has started to show similar trends as what showed earlier in the year, where the currency was one of the world’s weakest as the Bank of Japan keeps monetary policy very loose.

Inflation in Japan was at 2.5% in April, which would be the first time that inflation in Japan came in above 2% since 2008 if we strip out the impact of sales tax increases. And to kick off this week, BoJ Governor Kuroda had some remarks on the matter, saying that inflation needs to reach 2% ‘in a stable manner,’ which gives the impression that he’s not too bothered by last month’s print. In response, the Yen has broken down again to start the week, with USD/JPY punching up to another fresh 20-year-high.

In EUR/JPY, there could be topside potential here, as well, and this could be a more attractive venue than EUR/USD for Euro-strength scenarios.

Since bottoming-out on May 12th, the pair has been on an absolute tear, jumping by more than 800 pips and, currently, working on its eight consecutive daily gain. This highlights that growing divergence between a European economy looking at rate hikes and a Japanese economy that’s not even considering such.

EUR/JPY Monthly Price Chart

EURJPY monthly price chart

Chart prepared by James Stanley; EURJPY on Tradingview

EUR/AUD for Bearish Euro Themes

While the Euro has been coming back to life on the back of hike expectations, so has the Australian Dollar, and to an even greater degree than what’s shown around the single currency of late.

From the monthly chart below, we can see the pair showing considerable gyration over the past few months while holding near multi-year lows. Of note here is the 38.2% Fibonacci retracement at 1.5257, which was support in February and March of 2021 before coming back as resistance a few weeks ago.

EUR/AUD Monthly Price Chart

euraud monthly price chart

Chart prepared by James Stanley; EURAUD on Tradingview

EUR/AUD Shorter-Term

On a shorter-term basis, that resistance inflection in May has led to a shift in short-term price action, with sellers pushing down to a fresh lower-low while breaching below a bullish trendline. This can offer some scope for shorts, particularly with a hold below the 1.5000 psychological level.

EUR/AUD Daily Price Chart

euraud daily chart

Chart prepared by James Stanley; EURAUD on Tradingview

--- Written by James Stanley, Senior Strategist for DailyFX.com

Contact and follow James on Twitter: @JStanleyFX

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

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