EURAUD broke below the neckline support of its head and shoulders pattern on the daily time frame, indicating that the pair is in for longer-term declines. 

Price is now 200 pips below the neckline at the 1.4000 major psychological level and could be in for a thousand more pips in losses, as the chart pattern is roughly 1200 pips in height.

Before price heads any lower though, the pair could still pull back to the broken neckline support for a retest. Stochastic is already indicating oversold conditions, which means that euro sellers are exhausted and that buyers might take over. A higher pullback might last until the next area of interest at the 1.4200 major psychological level.

The shorter-term moving average is trading below the longer-term moving average, confirming that the path of least resistance is to the downside. These indicators might also hold as dynamic inflection points if price makes any forex corrections.

There are no major reports lined up from both the euro zone and Australia this week, although it’s pretty clear that the former is fundamentally weaker than the latter. Last week, Australia printed a stronger than expected jobs report, lowering the odds of another interest rate cut from the RBA.

Sentiment in the euro zone has been somewhat improving though, as ECB Governor Draghi seemed more optimistic about the ongoing developments in the region. However, with the central bank’s quantitative easing program already underway and set to carry on for the next 18 months, further euro weakness could be in the cards.

Commodity price action and risk sentiment could also play a role in determining where this pair could be headed for the week, as the FOMC interest rate statement could have a significant impact on financial markets towards the middle of the trading week.

By Kate Curtis from Trader’s Way