Nick Nasad
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EUR/AUD Slides After Forming Head-and-Shoulders Pattern

Something has certainly got into the Australian Dollar of late. While the AUD/USD continues to push higher (running over my short attempt in the process) there are fairly dramatic moves across other AUD crosses as well.

One such cross is the EUR/AUD (though we can look at GBP/AUD in a similar light). 

The set-up here was very technical in that we had one of the most popular and familiar patterns play out - a head-and-shoulders top.

In this 4-hour view we see that a measured target for the H&S move (from top to neckline, which in this case is about 250 pips) taken from the neckline targets the 1.4470 area, which is close to the old level of resistance that was cracked early last week at around 1.4454. In addition to the H&S pattern we also have violated the upward sloping trendline.

Now, its a little bit late in the game here, but its worth noting the very strong action from the AUD which may imply that market participants are beginning to alter their mind about the AUD. Perhaps the weak Aussie economy has been priced in, and the recent data from China, which is showing sings of bottoming out from a soft patch in the 1st half of the year, have made those shorting the AUD cautious. On the other hand, we did have a sizable run-up prior to this week's decline and we could be seeing a normal retracement pattern bear out.

Therefore, whats key here is to see what happens next at the 1.4454 area as well as continuing to monitor data and sentiment out of China. A break of 1.4454 means we are back into the ranging conditions we had prior to the pair's EUR's breakout, while if support holds it could be the launching pad for the next long.

- Nick