Australian Dollar Breaks Out of Channel, Euro Extends Decline

The Australian dollar surged higher against its U.S. counterpart and is the best performing currency amongst the majors on Thursday, while the Euro weakened for the second day and continued to hold the channel formation from the previous month’s high (1.4581).

The Australian dollar surged higher against its U.S. counterpart and is the best performing currency amongst the majors on Thursday, but the lack of momentum to cross back above the 20-Day SMA at 0.8929 may temper the advance as the Reserve Bank of Australia holds a neutral outlook for future policy. The AUD/USD remains 130pips higher on the day after moving nearly 118% of its ATR, and we may see the pair fall back to close the gap from the 120-SMA at 0.8783 as the 30-minute RSI falls back from overbought territory. However, as the economic docket reinforces an improved outlook for the $1T economy, with price action breaking out of the downward trending channel from the January high (0.9331), we may see the pair trend sideways going into the Asian trade as market liquidity thins ahead of the weekend. Nevertheless, investors are pricing a 47% chance for a 25bp rate hike by the RBA at its next policy meeting on March 1 according to Credit Suisse overnight index swaps, but we may see the central bank keep rates on hold over the coming months as they aim to balance the risks for growth and inflation.

The Euro weakened for the second day and continues to hold the channel formation from the previous month’s high (1.4581), and the single-currency looks poised to test the yearly low at 1.3585 as the 50-Day SMA (1.4286) crosses below the 200-Day at 1.4350. The EUR/USD remains 90pips lower on the day after moving 151% of its average true range, but we may see a corrective retracement going into the Asian session as the 30-minute RSI bounces back from oversold territory. Meanwhile, economic activity in the Euro-Zone is forecasted to expand 0.3% in the fourth-quarter, while industrial outputs are expected to increased 0.1%, and the slew of data could drive the exchange rate higher as the outlook for future growth improves. Nevertheless, as the European Union aims to support the economies operating under the single-currency, with the European Central Bank holding a dovish outlook for inflation, policy makers are likely to take unprecedented steps to shore up Greece as the group seeks to stabilize financial conditions throughout the region.

[B]Join us to discuss the outlook for the major currencies on the DailyFX Forums[/B]

[I]To discuss this report contact David Song, Currency Analyst: <[email protected]>[/I]