The euro has drifted a bit lower against the Australian dollar on Friday, as we continue to see the downtrend playing out. This is a market that I have been watching for a while.
EUR/AUD
The euro has fallen against the Australian dollar during the session on Friday, weakening considerably against the Australian dollar as the day goes on. This is a continuation of the overall downtrend, and it is worth noting that we had bounced quite nicely over the last 48 hours from a major support region, namely the 1.61 level that I think extends down to the 1.60 level. This area is important in this market, going back several years.
This is a market that now has to determine whether or not it will be sideways following the consolidation going back to April or if we will finally break down.
The ECB raised rates by 25 basis points yesterday to 2.5% and signaled that further tightening is potentially possible. Some policymakers have openly discussed another rate hike potentially as early as October. That, in theory, should support the euro, but Australia has an even stronger rate backdrop.
The RBA cash rate is currently 4.35% following 3 hikes this year, and markets expect Australia could raise rates again because of persistent inflation and higher energy costs. So, as things stand right now, the interest rate differential is currently Australia 4.35%, Europe 2.5%. That is approximately 185 basis points in Australia’s favor, this should continue to put a bit of an overhang in this pair for the bulls.
Australian 10-year government bonds have also pushed above 5%, their highest level since 2011. The global risk environment has improved a little bit during the day as oil dropped, so that has also helped the Aussie. At this point, it looks like the market still wants to test that crucial 1.61 level.
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