After breaking below the neckline of a head and shoulders pattern on its 4-hour time frame, it’s clear that EUR/AUD is in for a downtrend. However, before the pair resumes its drop, it might need to pull back to the former support level and gather more selling interest at the nearby EUR/AUD resistance level.
Using the Fibonacci retracement tool on the same time frame shows that the pair is finding support at the 1.4800 major psychological level and that buyers are looking to push the pair a bit higher. A retracement to the 38.2% Fibonacci level might be enough to encourage more sellers to jump in.
EUR/AUD Resistance Trade Setup
The pair is still a couple of hundred pips away from the potential EUR/AUD resistance but stochastic is suggesting that there’s enough buying pressure left to push the pair back to that level. Shorting at the 1.5000 mark with a stop above the 61.8% Fibonacci retracement level or the 1.5100 area could yield a 2:1 return on risk with a target of 1.4800. Aiming for new lows could improve the return ratio but it would be prudent to adjust the stop loss to entry once price tests the previous lows.
Fundamentals favor a euro short versus the Australian dollar in the near term, as the ECB is mulling further easing options. In the latest ECB statement, Draghi mentioned that policymakers talked about negative deposit rates or expanding their LTRO program. Meanwhile, the RBA confirmed the EUR/AUD resistance bias as it has emphasized that they’re not looking to cut rates in the coming months.
Take note as well that the head and shoulders pattern, which is a classic signal of an incoming downtrend, is approximately 800 pips in height. This means that the resulting breakdown could be of the same size. Upon retesting EUR/AUD resistance, the pair has a long way to go before completing the reversal pattern.
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