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What GBP/USD and EUR/JPY Can Tell Us About AUD/USD's Breakout

What GBP/USD and EUR/JPY Can Tell Us About AUD/USD's Breakout

2016-10-20 02:00:00
John Kicklighter, Chief Strategist
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Talking Points:

  • AUD/USD has closed above trendline resistance that has capped the pair for the past six months
  • Risk trends are suppressed, the Aussie has limited fundamental engagement and there is more tech resistance above
  • We look at EUR/JPY's 'break of necessity' and GBP/USD's motivated drive lower for guidance on AUD/USD's conviction

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What separates a good breakout trade from a bad one? Follow through. Whether, we are looking for the technical fuel in the form of momentum or the fundamental motivation to sustain a drive; the ultimate result is the same in the measure of how setting objectives beyond the entry on the break. With Wednesday's close, AUD/USD marked a notable close above a six-month descending trendline that has shaped a wedge that has developed over a much longer period. With traders looking for strong moves in a market otherwise prone to starts-and-stops, this will draw a considerable amount of speculative interest.

To help gauge the separation between a productive breakout and one that falters almost immediately upon lift off, it is worth looking at examples of each. On the failed effort, there is EUR/JPY. This pair completed what would be considered a break of necessity - it simply ran out of room. What it found immediately below its short-term range was further technical boundaries, a lack of risk trend or monetary policy motivation, and the reality that major event risk (ECB rate decision) stood directly ahead. There difficulty was significant right out of the gate. In contrast, GBP/USD has seen remarkably productive trend bear trend following key level breaks from the Brexit outcome. The motivation was a strong fundamental development that required significant repricing and offered a constant pressure point thereafter.

Working against AUD/USD's potential right off the bat is the rarity of trend throughout the markets. There are a few assets and currencies that have extended trend (like a pound tumble) and those that have kept traction require a decisive motivator. There is little on the risk appetite front to support the Aussie's carry appeal, recent data like the Chinese GDP figures generated little heat and the Dollar is steady. On a technical front, there are notable technical levels immediately beyond the wedge resistance recently broken. Does this tentative move have the potential to develop into something more? The AUD/USD and characteristics of strong breakouts is the focus of today's Strategy Video.

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