Euro analysis: EUR/GBP and EUR/AUD face critical levels
14:52, 12 October 2022
Markets seem to be fixated on the UK this week. They have a good reason to be, but there have also been some pretty interesting moves elsewhere that deem attention. So let’s take a look at the moves in the euro in recent sessions.
Just as a recap before we move on, the stability of the UK financial system is being brought into question. After some wild moves in gilts, the Bank of England (BOE) has had to step in numerous times to calm market jitters and halt the selloff in sovereign bonds. The result has been slightly underwhelming, as its calming effect on the markets has been diminishing over the last few days. Yields remain at recent highs as investors struggle to find a reason to buy back into UK bonds and the pound is taking the hit.
Staying away from the dollar for this one, EUR/GBP has seen some interesting moves over the last few days. The recent announcement that the BOE is going to go ahead with the end of the bond-buying program this week has helped the Pound recover some lost ground, leading EUR/GBP to reverse most of the upside seen so far this week. Monday and Friday’s daily candlesticks were already showing indecision in the continued bullish run, but recent support around 0.8750 was able to support buyers further as the sentiment around the pound worsened on Tuesday.
The moves in the bond market have been critical for EUR/GBP in recent weeks. The following chart serves as evidence of the bullish sentiment rising in EUR/GBP as the UK gilt market deteriorates, diverging from its previous correlation. The yield differential between Germany and the UK (DE10Y-GB10Y) has been widening as UK yields continue to move higher, evidencing the market concerns regarding fiscal and monetary policy in the UK.
Chart: EUR/GBP vs (German 10-year yield - UK 10-year yield)
If the rate differential trade continues to play out, the chart is suggesting today’s pullback in EUR/GBP won’t hold and the pair will continue to push higher back towards 0.89.
EUR/AUD and EUR/NZD
Another two interesting pairs to keep an eye out for are EUR/AUD and EUR/NZD. The performance of the euro against the Aussie and the Kiwi has been inspiring considering its average performance over the last year. Most of the move has come since the lows in September, on the back of the loosening of the supply tightness in energy markets. The current levels are still below the highs seen back in March before the Russia-Ukraine tensions sent commodity prices soaring, but the euro has managed to recover a large part of those losses against the Aussie and Kiwi.
Chart: YTD performance of EUR vs a basket of currencies
One thing keeping the Aussie dollar subdued is the recession fears stemming out of China, one of its biggest commercial partners. The less hawkish tone at the Reserve Bank of Australia (RBA) latest meeting has also weakened its domestic currency, but EUR/AUD is looking overbought at current levels, especially after having broken above its 200-day SMA with little resistance. The 20-day SMA has now crossed the 50, 100, and 200-day SMAs and is hovering around 1.5090. The last time it was around this area we saw the July peak start to unwind, but the strength of the move over the last few weeks has cemented some good support along the way, with the 38.2% (1.5044) and 0.5% (1.5268) Fibonaccis being key.
EUR/AUD Daily Chart