EUR/USD & AUD/USD: outlook and trading zone

In today’s post we will look at EUR/USD and AUD/USD – In terms of the USD, we do have a market that is generally bearish the USD, and speculators are heavily short. We are looking for a turndown and in terms of the EUR/USD after falling back from 1.2350 we have seen it rally back and view this as a correction of oversold and a sell on weakness. In terms of AUD/USD, we have been trading in low volatility with just 200 pips from top to bottom – we are now coming up to test the top of the channel again and expect the rally to fade…

USD Speculative Positioning

The market is heavily short the USD and speculators are holding a position that is near its biggest since 2011 which can be seen on the chart below. In terms of price action the USD has done very little since mid-December, despite everybody talking it down volatility in USD pairs has been generally low. The aggregate dollar short remains big historically but positioning has not changed much in the last few weeks. With the market so short and bearish the USD we would expect a short-covering rally.

EUR/USD

In terms of the fundamentals – The US economy is doing better than euro zone’s bond yields also favour the USD but a negative for the USD generally has been strong stock markets that are at new multi-year highs. Despite the strength in stock markets in the last 6 weeks, the Euro has fallen back as we can see on the chart below.

We have seen the EUR rally recently but we are now seeing volatility drop as we come up to test the 1.2200 level which we think will hold the rally. A turndown through nearby support and a move through 1.2080 is expected to follow through to major support levels as the large speculative short position is taken out on stop. If we were to break 1.2200 we would see it as a sell back through the level at 1.2170 with a stop back behind daily highs.

AUD/USD

The AUD is a proxy risk on currency and has been supported by strong stock markets and also surging commodity prices particularly iron ore which is Australia’s biggest export. Despite the bullish backdrop for the Aussie in terms of the fundamentals, it’s hardly moved in the last 6 weeks.

Volatility is low with a channel that is 200 pips from top to bottom which could indicate the bullish fundamentals are priced in. We see the Aussie as a sell on weakness through support indicated at 0.7730 – if we were to breakout to the upside we would look for the breakout to fail and sell back through 0.7770.

Research provided by LearnCurrencyTradingOnline.com

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