EURAUD might be done with its recent rallies, as a reversal pattern seems to be forming on its 4-hour time frame. Price is in the middle of completing a head and shoulders formation but has yet to create the right shoulder before confirming the potential selloff.
The neckline is located at the 1.5375-1.5400 area and a break below this region could add confirmation about the longer-term drop. Using the Fib tool on the latest swing high and low shows that the 38.2% level at 1.5600 might hold as resistance for now.
Stochastic is still on the move up, which means that buyers are in control of price action. In addition, the 100 SMA is above the 200 SMA so the path of least resistance is to the upside. However, there’s a nearby resistance at the 50% Fib or 1.5700, which might be the line in the sand for a correction.
Event risks for this setup include the release of Australia’s quarterly CPI readings. Analysts are expecting to see a 0.3% uptick in price levels but we might be in for a disappointing read if the oil price slump from last year is already factored in.
As for the euro, the ECB’s easing bias might keep the shared currency’s gains in check and the upcoming CPI estimates could strengthen expectations of further stimulus. Germany’s Ifo business climate index missed expectations yesterday, indicating that sentiment has turned sour once more.
Other potential catalysts include Australia’s quarterly import prices report, along with flash GDP readings from the top euro zone economies.
By Kate Curtis from Trader’s Way