By Jameel Ahmad, Chief Market Analyst at FXTM
In the currency markets, we have a strong partiality towards focusing mainly on the major currency pairs. This is hardly surprising, considering not only is the USD the world’s largest reserve currency, but reportedly equates to nearly 70% of all currency trades.
However, it is also important to take into account the “minor” currency pairs. It is not unusual for these pairs to fluctuate 100s of pips in a trading day. Not only are these pairs highly volatile, but their direction can be unpredictable. It can be said however that this year the EURAUD is one pair that has been predictable in its direction. Since the turn of 2014, the EURAUD has dropped over 1000 pips. All current indications are pointing towards this bearish pressure continuing.
In reference to the EU economy, the issue of possible deflation emerged in October and inflation levels have carried on decreasing since. Low inflation levels will make it increasingly difficult for businesses to reduce debt levels and there is a fear that consumer expenditure will decline, as consumers realise that non-essential purchases can be delayed, with prices falling.
Last Thursday, the ECB announced a collection of new policy measures to counter the threat of possible deflation. This included cutting interest rates to a new record low 0.15% and becoming the first major central bank to introduce negative deposit rates. Negative deposit rates means that banks will now be charged for leaving money unborrowed. The ECB are hoping that the new measures will entice banks to lend more, leading to an overall increase in inflation.
Unfortunately for the ECB, there are already strong signals that the EU economic momentum is stagnating. The latest EU GDP figure failed to meet the 0.4% expectation. Instead, economic growth was the exact same as the period before - 0.2%. Following the rate decision, Draghi revised down future GDP expectations and implied that the ECB is far from finished adding new stimulus to their economy.
In regards to Australia, its economic performances continue to outperform expectations. The Australian economy has proved resilient as it is trying to transition away from its mining/export reliance. Noticeable gains have been recorded in domestic sectors, such as construction and business expenditure.
The RBA recently warned that its economy is set to encounter weaker than expected levels of economic growth, though this is not expected to happen until later this year. Last week, Australian GDP expanded at an annualized rate of 3.5%. The Australian economic prospects appear positive for at least the next quarter, and this will encourage further declines in the EURAUD.
When observing the EURAUD from a daily timeframe, it is apparent that a heads and shoulders pattern formed over the New Year period, leading to this pair decreasing in valuation. Currently, this pair is being traded in a downward channel.
There will be times when this pair looks to progress upwards, after encountering heavy selling pressure, but the downward channel is under no imminent pressure and it is going to require a drastic change in EU economic sentiment for this to change. Both the RSI and Stochastic Oscillator are recording lower highs, which further indicates that the majority of upcoming momentum will be bearish.
Further support levels can be found at 1.4324 and 1.4175.
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