Continuing my recent theme of going with longer-term forex setups with today’s setup on EUR/AUD. Will the downward pressure be enough to break strong support levels?
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On the daily chart above, we can see a series of lower “highs” on EUR/AUD, and with the pair holding below the 100 and 200 SMA’s, I think the risk will remain to the downside for the market until those technical areas are broken. I’m willing to go with the bearish bias because of the euro, with it’s potential to see a new round of sellers because of the Greek debt disaster story. The latest development in that story is that Greece cannot make it’s next payments of €1.6B owed to the International Monetary Fund (IMF) in June, so they’re pretty much at the mercy of the Troika and opens up the potential of Greece leaving the European Union.
All of this is up in the air really because we don’t know what will happen and what the reaction will be from the markets…it’s all unprecedented. But I would think the probability of a negative outcome would be higher than a positive one given that a Grexit opens ups a Pandora’s box of problems for Europe.
On the other side of the pair is Australia, and there is that big risk that the Reserve Bank of Australia is likely to cut interest rates once again, but given how every rally has been knocked down in EUR/AUD, it’s likely forex traders have already decided shorting euros far outweighs shorting the Aussie in this market. Of course, we won’t know if the RBA will cut until we get there, but for now, I think after a few interest rate cuts already in 2015, the RBA is likely to sit back for another meeting or two to see how the Australian economy responds. Plus, the positive interest rate differential in my favor may be worth taking the trade until the market tells me otherwise.
With all that, I’m bearish EUR/AUD for now, and I’ve already shorted at market with a very wide stop to hopefully weather a surprise RBA cut or Greek bailout plan…or whatever else that can (and likely will) pop up out of no where. My target is a big one, but my next point of re-assessment is at the major support areas that held in March and April. Here’s what I’m doing:
Short full position on EUR/AUD at market (1.4004), max stop at 1.4479, max target at 1.2500
I’m only risking 1.00% of my account on this one, and with this trade structure, I have a potential reward-to-risk ratio of about 4:1. But I’ll likely re-assess after 1.3700 is tested to see if taking profit or scaling up to a bigger position to maximize reward makes sense.