AUD/USD and EUR/USD are looking vulnerable on the charts, pulling back in recent days on the back of disappointing domestic economic data. With uncertainty over the US, Eurozone and Chinese economic outlook elevated, it comes across as the type of environment in which the US dollar would normally shine.
By :David Scutt, Market Analyst
- AUD/USD was comprehensively rejected on an attempt to break back above its 200-day moving average on Wednesday
- EUR/USD has also broken its 200-day moving average as rate cut bets pile up on increasingly bearish economic data
- US non-farm payrolls will be released on Friday. A soft report is all but expected, meaning a surprisingly weak or strong report may generate the largest market reaction. Both scenarios would normally work in the USD’s favour
AUD/USD and EUR/USD are looking vulnerable on the charts, pulling back in recent days on the back of disappointing domestic economic data. With uncertainty over the US, Eurozone and Chinese economic outlook elevated, and with riskier asset classes having run so hard in November on hopes for a soft landing, it comes across as the type of environment in which the US dollar would normally shine.
AUD/USD goes from hero to zero
This time last week AUD/USD was looking great on the daily charts, punching through resistance levels and 50 and 200-day moving averages with ease, sending it to the highest level since July. But that changed earlier this week with another failed attempt to break long-running downtrend resistance starting a reversal which is quickly becoming ugly.
Sluggish domestic activity, weakness in Asian currencies like the Japanese yen and Chinese yuan, along with a continued deterioration in growth indicators such as crude oil, inverted yield curves and declining inflation expectations, working against the Aussie dollar. As a high beta play on the global economic trajectory, the AUD really needs a soft landing to be delivered to outperform longer-term.
The darkening backdrop has acted to pare back hawkish RBA bets with odds for another rate hike in February scaled back to next to nothing on Thursday, a sharp turnaround from late last week when another hike was deemed a coin toss. Mirroring shifts in other advanced economies, easing expectations are also building with a move as soon as August currently regarded as a line ball decision.
With so much good news having been priced in during November, it has left AUD bulls vulnerable to even modest disappointment.
AUD/USD price action has been bearish this week
The price action over the past few sessions suggests downside risks are building once again for AUD/USD, with the rejection of downtrend resistance followed up by a sharp reversal that sent the pair tumbling below its 200-day moving average. Having tried to force its way back above this important level in Asian trade on Wednesday, the reversal in European and North American trade acted to generate a bearish hammer candle, bolstering the case for downside. With MACD crossing over from above, it’s yet another warning of a potential shift in momentum.
Bears will be eying off a retest of prior resistance at .6520 near-term, with a break of that level putting the AUD/USD back in the trading channel it was stuck in for much of the second half of the year. Unless you have high conviction, risk-reward is not appealing for going short right now, although another push towards the 200-day moving average, with a stop above .6600 for protection, would present a better setup for lose looking for downside.
From a macro perspective, a soft US payrolls report is likely to be in the price following the release of weakening JOLTS openings and ADP employment reports, suggesting the largest market reaction may arrive from a payrolls number either extremely weak or better-than-expected. Both outcomes would normally be USD positive.
EUR/USD looking as bad as euro area data
EUR/USD is being impacted by many of the same forces driving the reversal in the AUD/USD, although data on the continent looks far more advanced when it comes to the economic cycle. German factory orders provided the latest ugly data point, slumping 3.7% for October against expectations for an increase of 0.2%. That saw rate cut bets for the ECB ramp up even further with a 25bps move by March priced at 85%. Around 150 basis points of easing is currently priced into the euro area curve for 2024, weighing on the euro against a basket of major currencies, including the USD.
Having broken uptrend support last week, EUR/USD has subsequently fallen through its 200-day moving average and kept on going, printing three consecutive bearish candles. It now finds itself resting on horizontal support at 1.0765, providing a potential level to build a trade below. Risks look slanted to the downside based on the recent price action. With MACD and RSI having broken their uptrends convincingly, buying right now comes across as trying to catch a falling knife.
Should the price break 1.0765, it will allow traders to initiate shorts, with a stop above the level for protection, targeting a move towards 1.0690. Conversely, should the price hold the level, it will allow for longs to be set, with a stop below, for those looking for a counter-trend squeeze.
– Written by David Scutt
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