EUR/AUD, GBP/AUD: Fed rate cuts, China stimulus add to downside risks

• AUD outperformed last week against EUR and GBP
• As cyclical currency, the combination of fresh China stimulus measures and US soft landing hopes are providing tailwinds for the Aussie
• Bias switches to selling EUR/AUD, GBP/AUD rallies

Overview

There’s a lot of excitement in Chinese markets about the latest stimulus measures to address flagging economic growth. Stocks are surging, so too commodity prices linked to construction and industrial activity. Given it’s often used as a proxy for those traders looking to play China without directly investing in China, this type of environment should benefit cyclical currencies such as the Australian dollar.

This note looks at the technical picture for EUR/AUD and GBP/AUD, providing levels for traders to watch should initial excitement surrounding the China stimulus measures extend beyond the short-term.

China data disappoints despite lowered expectations

Before looking at what’s been influencing the crosses, the chart below partly explains why Chinese policymakers moved to boost economic activity last week. It’s Citibank’s China economic surprise index, measuring the aggregate performance of incoming data relative to market expectations.

Source: Refinitiv 

With a score of -35.4, the index indicates most economic data has been surprising on the downside in the September quarter, a notable development given expectations weren’t that high to begin with. It’s also been a factor that’s limited upside for the Aussie even with the softer US dollar.

Cyclical tailwinds strengthen

Given improved prospects for Chinese economic growth, the Aussie is now benefitting from a pickup in cyclical asset classes as seen in the correlation analysis looking at EUR/AUD on the left and GBP/AUD on the right.

From top to bottom, 2024 Fed rate cut pricing is shown in black, China A50 futures in blue, SGX iron ore in green, spot silver in yellow, COMEX copper in purple and USD/CNH in red. The correlation score is based on movements over the past 20 trading sessions.

What’s noticeable is the relationships, be they positive or negative, have strengthened over the past month, with tailwinds created by optimism the Fed will be able to stick a soft economic landing boosted further by China’s stimulus measures.

While far too early to determine whether the optimism is justified, recent developments have provided a window for the Aussie to outperform against lower beta plays on the global economy such as the euro and British pound.

EUR/AUD breaks down

EUR/AUD has broken down on the weekly chart, falling through a long-running uptrend and horizontal support at 1.6254 last week. With momentum indicators providing bearish signals, the downside break may encourage more traders to join the move, putting a larger downside move in play.

Those considering shorts could do so around these levels with a stop above 1.6150 for protection. On the downside, initial targets include 1.6000 and 1.5850. If the latter were to give way, there’s not a lot of visible levels evident until 1.52561 where the price found constant support in late 2022 and early 2023.

GBP/USD pushes through key level

GBP/AUD is also looking heavy on the weeklies, pushing through 1.9349 which has often thwarted bearish moves dating back to early August. With RSI (14) and MACD generating bearish signals on momentum, this attempt may succeed where others have failed.

My preference would be to see weekly close below 1.9349 before initiating shorts, allowing for a stop to be placed above the level for protection. On the downside, the price bounced from 1.9280 in the middle of August, making that a level of note. If the move were to extend through that level, the December 2023 uptrend and 1.9100 would be potential downside targets for bears.

-- Written by David Scutt

Follow David on Twitter @scutty