Crunch time for forex markets creates opportunity

What looked as though it would be a quiet week has been anything but.  Big moves in the Euro and Aussie Dollar now see them testing key chart levels in a situation that could provide trading opportunities.

EURUSD weekly chart

The Euro has arrived at trend line resistance around 1.1450.

This looks pretty significant. If the Euro respects this resistance, it will leave intact the large chart pattern that began with the low in March 2015.

Rejecting this resistance could be a bearish development for the big picture. It could see the Euro return to the major support around 1.03 with potential to break below it.

The slow stochastic  on the weekly EURUSD chart is well over bought, giving scope for a quick reversal if the Euro begins to falter around this resistance

In these circumstances, it would pay to have a bit of tolerance about this trend line resistance. We could also see a failure after a false break to the upside. Any turning point below about 1.15 might be significant

However, if the EURO breaks clearly above this trend line, it will be  potentially bullish . The Euro will have broken out of its major trading range with potential to retest previous peaks at 1.16 or 1.17 for starters.

                     

AUDUSD weekly chart

The Aussie Dollar is also testing trend line resistance.

The difference between the Aussie and Euro charts is that the Aussie is retesting resistance after a partial pull back into the pattern. This contrasts with the Euro which has rallied all the way from pattern support. As a consequence, the slow stochastic on the Aussie is not yet over bought.

Horses for courses

Given the size of the Euro’s rally and the fact that it’s over bought, it may be the best alternative for the bearish scenario and those looking to establish short positions if these trend lines are rejected

However, if there is a bullish outcome with bullish breaks to the upside, those looking to join the uptrend and buy dips may favour the Aussie. It’s up trend is newer and not yet overbought suggesting greater potential for upside momentum.

Background

Things have improved for Europe in recent months. The economy has recovered, the French election reduced political risk and a compromise has been reached on liquidating problem banks in Italy. At the same time, the US economy has not done as well under the Trump Administration as many anticipated improving the relative outlook for Europe compared to the US

However, the bearish EURUSD chart outlook would fit with a scenario where this relative improvement has run its course. Despite recent improvements, we are still left with a scenario where European growth is likely to be significantly lower than in the US and where the ECB will continue more slowly on monetary  than the Fed putting downward pressure on the Euro.

A bullish Aussie Dollar scenario is likely to require an ongoing rally in the iron ore price and continued solid news on China’s economy.