FUNDAMENTAL ANALYSIS
William Lun
AUD/USD
The Australian Dollar ended the week down 1.53% to 0.6812 after recession fears intensified on Friday. Friday’s downbeat US PMI data added to the risk-adverse sentiment taken by the market, which led to a market-wide selling of the AUD. Moreover, markets expect a more hawkish Federal Reserve, with investors pricing in a 0.75% increase to the Fed Funds Rate compared to a 0.50% increase by the RBA. This interest rate differential will add to demand for the US dollar and thus push AUD/USD lower ahead of the key RBA, Federal Open Market Committee Minutes and the US Jobs report for June.
EUR/USD
After an unexpected drop in German inflation and above consensus readings in France and Spain, Friday saw eurozone-wide CPI figures for June remaining slightly above consensus. Inflation readings have had a reduced impact on the Euro this week as the markets seem to have cemented their European Central Bank’s (ECB) tightening expectations already. The ECB’s euro trade weighted index is barely 1% off the lows of the year, meaning markets will sense that the ECB will have much more difficulty hiking rates than the Fed. Furthermore, recent Nato expansion provides for an uncertain investment environment and thus, EUR/USD should remain mostly correlated to global risk sentiment and USD dynamics. This has resulted in EUR/USD falling 1.45% and the DAX30 dropping 2.33% this week.
In the US, the ISM manufacturing index dropped further than expected on Friday, despite this, a dollar correction should be short lived as the dollar remains supported in a challenging environment for global risk assets with tighter liquidity and risk of further global slowdown. The S&P 500 is down 2.21% this week.
TECHNICAL ANALYSIS
Anton Ragusa
AUD/USD
The AUD/USD currently trades below the range which has been respected since late April, indicating there is likely to be further downside in the near future. With economic data looking bearish for the AUD we will likely see the 0.672 support level hit in the coming weeks. However, this level will likely be hot again after a retest of the major resistance order block situated around the 0.687 area, where we saw major distribution (heavy selling by higher time frame traders). This order block highlighted in red is extremely likely to be respected and would need a significant economic catalyst such as a more hawkish RBA or more dovish Fed if it were to break through and test higher levels such as the previous range mid at 0.705. Overall we will likely see a relief rally on AUD/USD in the coming days before the price action returns to the downside.
EUR/USD
The Euro is finally seeing some support after falling into a consistent downtrend since late last year. The price has been stuck in a range for the past few months, and has tended to trade in the lower half of this channel. With very frequent testing of the range and swing high at 1.08, the Euro is likely to break towards the downside of this range to touch levels not seen since 2003, following the formation of a head and shoulders pattern. However, with the current support of the range lows at around 1.04 showing a strong rejection in the past day there will likely be some relief in the coming days. We could see prices reach the next resistance level at 1.053 or even the range mid at 1.055-1.06. Upon retest of these levels we would see continued downside and without a serious catalyst that would reverse the current bearish sentiment on the Euro, we are likely to see a break of the bottom of the range support and even lower prices for EUR/USD.