This currency pair took our attention due to several factors. First of all, EUR/AUD does not depend on the situation with the U.S. dollar. The correlation between the greenback’s performance in the currency market on one side, and stock indices on the other, could be changed as well, with an unpredictable outcome. The trick is that the risk appetite for global equities and other high-yield assets might stop influencing the demand for the world’s reserve currency. That trend used to be in place during all of this year, and as we’re approaching last four trading weeks of the year, the usual price action might not work any more. The tough situation is worsened with the latest macroeconomic data from the United States. GDP report, consumer confidence index and trade balance - all of those events were negative for the greenback, showing significant sighs of the leading world's economy to slow down further in 2019. The Federal Reserve is uncertain regarding their predictions on the monetary policy side of things, signalling a possible pause in the tightening signal. At the same time, the chances for several more rate hikes are still on the table and traders’ sentiment would become more data dependent, changing the outlook several times which will create an additional volatility in the U.S. dollar currency pairs.
Second, a major shift might be on hands for the European Central Bank’s economic forecast. The problem is not only in Consumer sentiment, Business activity and PMI index slowing down and approaching towards the red line which divides the growth from stagnation. We mean here a much more crucial report which could have an impact for ECB’s steps in 2019. Core Consumer Price index missed the market’s expectations last week, showing 1% growth instead of 1,1% previously anticipated. That might seem as insignificant change though. However, that fact could give a huge justification for Mario Draghi - well-known dove - to keep injecting incredible 40 billion euro into the European financial system. That additional liquidity is, of course, supportive for local companies, especially exporters. But it also makes the fixed-income market unattractive for foreign investors who will be looking for higher-yield investments in other regions. All of the recent declines in the single European currency was limited by the expectations that ECB will start tightening in the second half of 2019, but just try to imagine how many postponed options would be triggered if the regulator postponed (or cancelled?) the interest rates hikes. EUR/USD might start losing the ground as early as in December this year, breaking through important technical and psychological support at 1.1200.
Meantime, Australia is one of the underestimated markets in 2018. The Aussie was under the heavy selling pressure because of several factors including potential world economic recession, lower demand for commodities in the main market for Australian export - China. But one of the scariest things for investors was a trade war between the United States and China. The Australian dollar is a commodity currency, being vulnerable to the price and demand for commodities such as industrial and precious metals. Any trade war is bad, but if the two largest economies in the world oppose each other, imposing import tariffs and other restrictive measures for international trade, that’s the ugliest nightmare for investors. The second event we’re talking about here is the agreement between Trump and Xi to postpone the trade war escalation, freezing restrictive measures. The main idea is for China to open the local market for U.S. goods, which is the condition to make the trade deal, the ‘most important in history’, according to Trump’s words. That fact completely changes the fundamental background for Australian assets which should surge on that news. AUD/USD will follow the same bullish rush, coming back to the highest levels seen in 2018, at least.
So, what do we see here? Right, the divergence. It’s the main stuff for any currency speculator to find in the deep ocean of factors influencing the price action. Traders will stick to news headlines in order to confirm that suggestion. Moreover, the first reaction is already on hands, things move fast here, and if you wanted to make profits, you must react rapidly.
The chart below is the long-term weekly timeframe of AUD/USD which reflects the period since early 2016, or 2 and a half years in total. As we can clearly see, the uptrend persisted during 18 months starting from February 2017. The ascending trend channel has been breached recently with the weekly close price. Moreover, the static support from the bearish retracement in May 2018, has been breached as well, which creates a dangerous precedent for the bulls, losing one of the last defence lines. The next support is placed at 1.5200 level, and it’s just a matter of time when the bulls which reach there. Taking in count the speed with which EUR/UAD declined from the top level, we might suggest that it will be breached much sooner than some of the bulls hope for. Once that happens, the pair would just lose the ground due to the absence of any significant technical support levels. Therefore, buying a long-term PUT option for EUR/AUD might be a lucrative investment.