The head and shoulders pattern on EUR/AUD’s daily time frame finally made a confirmation signal when price broke below the neckline of the formation. This means that the previous uptrend is over and that a selloff is about to ensue.
Take note that the pattern is roughly 800 pips in height, which means that the resulting breakdown could be of the same size. The neckline support was at 1.5000, so the decline could reach until the 1.4200 mark eventually.
Data from the euro zone has been weak lately, causing some ECB officials to start mulling about negative deposit rates. This could keep EUR/AUD in selloff mode, as traders’ sentiment for the Australian dollar is improving. Recall that weak Chinese data previously sparked declines for the AUD, but traders are now pricing in the prospect of additional stimulus from the People’s Bank of China or the Chinese central bank.
EUR/AUD Technical Outlook
A breakout from this wave pattern suggests that a new trend has formed and the pair has completed all the primary waves of its uptrend. The neckline break constitutes part of the second wave, which means that EUR/AUD has a long way to go to continue the downtrend.
There are no event risks for both the euro zone and the Australian economy today so the ongoing selloff might carry on. Do take note of possible gaps over the weekend though, as these might offer opportunities to hop in the downtrend at a better price.
Also, the pair might be due for a quick pullback since stochastic has already reached the oversold zone. The indicator hasn’t crossed upward and showed upward momentum yet, but if the pair does retrace, the broken neckline support might hold as resistance.
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