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Andreas Zanin
Analysis | December 1, 2020

Trading Big Channels and Breakouts EUR/USD AUD/USD Analysis

FX Outlook – Trading Big Channels and Breakouts EUR/USD AUD/USD Analysis

01/12

In both EUR/USD and AUD/USD we have been trading in a channel for several months we are now at the top of the channel in both pairs will we breakout to the upside or will resistance hold? For both bulls and bears keying off the level gives the opportunity to initiate good risk to reward trades.

In terms of buying strength, traders can take breakout trades out of the channel using timed trades and if the channel holds, trades can be taken on weakness with a stop behind the top of the channel (see charts below for key technical levels) so price action traders can just follow price action either way.

Our view in terms of looking at sentiment is the top of the channels will probably hold on a close basis for the reasons below…

Speculators have sold the USD and bought other currencies as we have strong stock markets and optimism about a global recovery. The AUD’s status as a risk proxy currency has seen it remain firm on the USD and it’s now looking to breakout of the channel about the 0.7400 level…

“There are a reasons to suspect that a great deal of caution should be exercised when considering upside potential for AUD/USD. These concern the risk that there may be too much positive vaccine news in the price, the actions of the RBA and the impact on Australian exports resulting from tensions with China.” (RABOBANK)

The vaccine news is getting priced in and Australian exports will probably peak even without tensions from China escalating further. The RBA kept rates unchanged as expected by the market and will take a wait and see approach to policy as we move forward.

In terms of commodity prices, it’s worth noting that since the November meeting the AUD has moved up around 3% on a trade-weighted basis. Westpac’s index of commodity prices is up nearly double that at just under 6% so the market view on strong commodity exports and prices moving forward is getting priced in.

“The International Monetary Fund has warned that unless Europe’s “pandemic dynamics change significantly” in the coming months, economic growth in the euro area is set to be weaker than previously forecast.” (CNBC) The IMF said yesterday that additional fiscal and monetary stimulus would likely be needed to support the region but there is a problem…

“The dogged opposition of Poland and Hungary to the European Union’s budget and recovery package has turned into a dangerous stand-off.” (Bloomberg) Hungary and Poland are vetoing the distribution because The EU is making money distributed conditional on Poland and Hungary adhering to democratic standards and the rule of law of which both countries are under investigation.

If an agreement is not reached by Dec. 7, then the EU will have to operate via monthly emergency budgets next year which would mean the suspension of all but essential spending.  The dispute is getting little attention from traders who have bought the euro on the view of a strong economic recovery next year – the data doesn’t support this view but if the dispute is not solved it should hurt the bullish sentiment towards the EUR.

Note: On the charts below, we refer to round number turbulence which means: The majority of traders place sell or buy orders on round numbers or within a few pips of it. You get heavy volume and, in our view, its best to give some clearance of round numbers if buying or selling.

Technical Analysis

AUD/USD In terms of an upside breakout if we move above 0.7430 (clear of round number order flow) the Aussie could be bought with a stop behind support at 0.7320. On a downside breakout the Aussie would be a sell through 0.7320 with a stop back clear of 0.7400.

EUR/USD: In terms of an upside breakout if we move above 1.2030 (clear of round number order flow) the EUR could be seen as a buy with a stop behind support at 1.1920. On a downside breakout the EUR could be seen as a sell through 1.1920 with a stop back behind the 1.200 level.

 

 

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