EUR/AUD has been moving sideways in a forex range, with support at the 1.4400 major psychological level and resistance at the 1.4550 minor psychological level. For now, price is testing the bottom of the range, pending a possible bounce or breakout.
Fundamentals suggest a potential downside break, as the ECB has an easier monetary policy compared to the RBA. The European Central Bank cut several interest rates in the previous month in an effort to stimulate lending and spending in the economy. Meanwhile, the RBA hasn’t changed its interest rates or monetary policy, as the economy struggles to stabilize.
Forex Range Breakout
To top it off, new sanctions on Russia could turn out to be negative for the euro zone as these could restrict oil supply in the region. This might lead to more euro weakness down the line and a bit of support for commodity-dependent currencies, such as the Aussie. After all, gold prices have been enjoying a bit of support in the flight to safety these days.
A downside break could lead to as much as 150 pips in losses, which is the same height as the rectangle wave pattern. On the other hand, a potential bounce could be limited to the 1.4550 resistance, which is still very likely to hold in the foreseeable future.
Event risks for the euro zone this week are the German and French manufacturing and services PMIs. Another round of weak and contractionary readings might lead to more euro selling, as this would lead to increased speculations of easing from the ECB. Recall that the central bank is already set to implement targeted LTRO starting September and December.
As for the Australian dollar, the CPI release could be the main event risk this week, with weak readings likely to lead to a bit of Aussie weakness.
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