EURO/AUSTRALIAN DOLLAR
The daily chart of EUR/AUD has formed a very tight rectangle pattern. Rectangle patterns are mostly continuation patterns, very few of them act as a reversal, especially in the FX markets. However, in this case I am leaning towards a break to the upside. The rectangle formed at a major area of support around the 1.60 area and the MACD indicator signaled a divergence that hasn't played out yet. The sell-off in equities signals some risk aversion which has been showing up in the FX market. The Australian Dollar is a currency that is affected by the risk sentiment of the general market. So, if risk aversion continues we could see the EUR/AUD trade higher.
Still, these are not the only characteristics that give me the bullish bias. While trading FX pairs that have neutral patterns, I tend to look at other correlated pairs that could have bullish or bearish patterns to confirm the direction of the neutral pattern. In the case of EUR/AUD, I like to look at the GBP/AUD, which I will discuss below. In the table below you can see the correlation table for the EUR/AUD and the GBP/AUD, which signals that the correlation of the two currency pairs is fairly high, which makes it a logical comparison.
British Pound/Australian Dollar
The daily chart of GBP/AUD formed an inverse head & shoulders pattern with quite a bit of confluencing factors. Price is currently sitting at a weekly ascending trendzone, these trendzones replace trendlines when price is very erratic and it is impossible to find a well-defined trendline. However, in my findings, I have noticed that trendzones tend to be less reliable than well-defined trendlines. The MACD signaled divergence in the month of June and July which also adds to the bullish bias. When looking at a head & shoulders or an inverse head & shoulders, I like to see the right shoulder (high or low, depending on direction of pattern) reject the 50-day moving average, which again is the case.
Now that we have analysed both currency pairs we can conclude that the EUR/AUD rectangle has a higher than usual chance of an upside breakout. A daily close above 1.66 would be a signal that the currency pair will try to trade higher towards 1.75. The GBP/AUD will need to clear the neckline with a break above 1.845 for a buy signal. I do want to reiterate that a rectangle is approximately 80% of the time a continuation pattern so, a breakdown of EUR/AUD is still possible and much more likely to happen based on probabilities, yet I'm personally leaning towards a break to the upside, if that actually happens, will be decided by the markets.