The Euro found itself struggling against the Aussie dollar again on Wednesday, as we are sitting on a major support level. With diverging central banks, this trade could be a great “sleeper trade.”
If we were to break down below there, then it could send this market down to the 1.71 level. Short-term rallies will continue to be sold into from everything I can see. It is worth noting that we have just had the so-called death cross fire off with the 50-day EMA dropping below the 200-day EMA, which, is a very negative sign.
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With this being the case, markets will continue to be a sell the rally type of situation, and it does make a certain amount of sense considering that the central banks are in completely different places. The European Central Bank is likely to keep interest rates relatively flat, while the Reserve Bank of Australia is likely to hike rates sometime in the next couple of meetings. In other words, the markets are starting to price in the idea of the Aussie offering more interest.
Trap Door Effect
If we do break down below that 1.73 level, I expect the move to the 1.71 level to be rather quick. Anything below there opens up like a trap door effect, and we could find ourselves dropping all the way down to the 1.65 level before it is said and done.
If we were to turn around and rally, perhaps breaking above the 200-day EMA, currently at the 1.7561 level, then you could see the Euro rise toward the 1.81 level. But really, at this point in time, that is swimming upstream. As long as the RBA is likely to have to raise rates, and Chinese manufacturing continues to rebound, I think you have a situation where this pair has quite a bit of downward pressure.
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