EUR/USD Breaks Down as USD Breaks Out – But Can They Maintain?
The volatility slump across FX-land may be coming to an end. Heavy emphasis is on the ‘may’ in that statement, as this is a relatively new observation that hasn’t yet proven that it’s here to stay. But, the US Dollar has broken-out above an ascending triangle formation that’s been building over the past five months, and after a slow start to the year, FX traders are gearing up for increasing volatility across USD-based currency pairs.
US Dollar Daily Price Chart: Ascending Triangle Breakout to 22-Month Highs
But are FX markets out of the low-vol woods yet? There have been fits and starts of volatility around the USD over the past six months, each seemingly coming to a head before fresh highs or lows could be established. The driver for this current move appears to have sparked from a batch of European PMI reports released last week, which helped to push EUR/USD back down to a big zone of support and, in-turn, the US Dollar towards resistance. Showing up along the way were a spike in Oil prices along with a tweet from President Trump mentioning the potential to retaliate against European tariffs. Noticeably missing here are positive-USD drivers, such as FOMC verbiage or stronger US data. Instead, this appears to be a defensive move driven by dynamics in related markets, such as the Euro or perhaps even the British Pound.
Below, I parse through price action in EUR/USD to examine strategy potential with the USD trading at fresh yearly highs. After that, I take a look at a market that could be of interest for fading this recent round of US Dollar strength.
EUR/USD: Bear Trap or Breakdown?
Europe’s economy is not healthy. That much is known. But, the rest of the world isn’t so great, either, and this is probably one of the reasons that the pair has avoided massive sell-offs despite a backdrop deteriorating fundamentals over the past five months.
EUR/USD had been caught in a range since last November, and this has held through a variety of drivers. The Rome-Brussels debt-standoff is what helped to push the pair down to current levels; but even though this theme was bubbling over with potentially catastrophic consequences in November, price action held the line of support. The resistance side of that formation soon came into play in December, right around when the ECB announced an exit from stimulus. And support was tested again a few months later when the bank announced a fresh round of TLTRO’s, at which point a fresh 2019 low was established around the 1.1175-level. Now, after months of back-and-forth price action, prices in EUR/USD are perching down to fresh lows.
EUR/USD Daily Price Chart
On a shorter-term basis, the big question is whether bears can retain control despite a relatively quiet economic calendar for the remainder of this week. Underneath current price is support potential around the 1.1120 area as a prior swing-low, the 1.1000 ‘psychological level,’ and then a zone that runs from 1.0814-1.0863.
EUR/USD Weekly Price Chart
For resistance potential, that well-worn batch of prior support remains of interest. The area that runs from 1.1187 up to 1.1212 had helped to hold support for a long time, and this could be an ideal area to look for lower-high resistance should a pullback show near-term. Just above that, last week’s swing-highs around 1.1261 can be connected to the 1.1250 level to create an ‘r2’ zone, and this could allow for bearish strategies with a hold below the ‘r3’ zone that runs from 1.1310-1.1325.
EUR/USD Four-Hour Price Chart
AUD/USD Drop Approaches .7000 Big Figure
This recent rally in the US Dollar has been very noticeable against commodity currencies such as Australian, New Zealand and Canadian Dollars. The backdrop in AUD/USD is especially interesting given the pairs proclivity to range this year, and this theme caught an assist in early-March from the .7000 big figure in the pair.
This is a level that, on a longer-term basis, has had a tendency to help cauterize the lows in AUD/USD. Since October of 2003 there have been but a handful of instances when prices tested below; each of which was followed by a push back-above. The most noticeable was the financial collapse when AUD/USD spent six full months below this level; but, outside of that, there has been only one monthly close below .7000, and that was all the way back in mid-2004.
AUD/USD Monthly Price Chart: A General Sense of Support Around he .7000 Big Figure
A defense of the .7000 level in AUD/USD can keep alive the range-bound scenario that’s lasted through much of 2019 trade; and should the US Dollar fall back from its current breakout, the topside of AUD/USD can be attractive. And this stance isn’t necessarily obviated by a test below .7000, as the key here would be a bullish response should that scenario begin to show. If prices do adhere to the current range, target potential remains around prior resistance areas at .7125-.7150 and then the .7185-.7205 area that helped to mark last week’s high.
AUD/USD Eight-Hour Price Chart
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