Mario Draghi has upped the anti for the Fed. It now seems highly likely that the ECB will add to its monetary stimulus in December. This has led to a sharp drop in EURUSD which is now testing its 200 day moving average. However, the ECB's stance might also have implications for the Fed and US interest rates. This, together with general risk on sentiment, has seen the Aussie Dollar rally against the US Dollar in today's session, triggering a potential buy set up.
Last night’s statement by Mario Draghi now poses a clear question for markets about the extent to which the Fed will diverge from other central banks. Mr. Draghi made it clear that global economic conditions and their impact on inflation were a major influence on the ECB's dovish stance. While Fed policy is driven mainly by the US domestic economy, it runs the risk that the $US will rise too far too fast if it appears unmindful of global conditions. If the Fed acts too aggressively in lifting rates at a time when other major banks are still easing and when there is still plenty of excess capacity in world economies it could put a rocket under $US . A really strong $US would be a negative for both US inflation and growth
While there is still a good case to hike Us rates in December, the ECB's dovish stance increases the odds that the Fed might delay. Paradoxically, this thinking could actually see the US Dollar weaken against currencies other than the Euro.
All this leads me to the Aussie Dollar chart. Yesterday's low bounced neatly off an AB=CD level. As things currently stand, this looks as though it could be confirmed by today's candle. So far it's made both a higher low and a higher high. If it now closes above yesterday's high, it's going to look like this AB=CD level has been well and truly rejected.
AUDUSD CFD Daily
Click to Enlarge
Confirmation of an AB=CD low here could set up for a rally towards the recent high at .7382. However it could be more significant than this. The current low could also be the end of a shallow correction that could see the larger corrective rally continue, perhaps towards the 200 day moving average around .76.
If today's candle fizzes out and the AB=CD level is not clearly rejected, it may pay to keep an eye on the 50% retracement levels around the .714 level for a possible buy set up at slightly lower levels.
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