EURAUD formed a double top pattern on its 4-hour chart recently, signaling that price is exhausted from its climb.

The pair just broke below the neckline of the chart formation, confirming that a reversal is bound to take place.

However, stochastic and RSI are both indicating oversold conditions, which means that a bounce back to the broken neckline near the 1.4450 minor psychological level might take place. Increased bullish momentum might push price back above the broken support area and lead to the formation of another top at 1.4750.

In addition, the short-term 100 SMA is moving above the longer-term 200 SMA, suggesting that the uptrend might still resume. If so, the pair could break past the previous highs and reestablish the uptrend later on.

The German Ifo business climate report is up for release today and the reading is expected to fall from 108.5 to 108.2, reflecting weaker optimism in the euro zone’s top economy. Ongoing concerns regarding the Greek debt issue probably weighed on sentiment as well, which might lead to a downside surprise and further euro selling.

Note that the double top formation is around 300 pips in height, which means that the resulting breakdown could be of the same size. This could take price to the 1.4100 to 1.4150 area.

There are no reports due from the Australian economy today but it looks like risk appetite favored the commodity currencies in recent trading sessions. China is set to release a leading index today and a strong reading could give the Aussie a boost since Australia is China’s largest trade partner.

Watch out for potential support around the 200 SMA, which has held as an inflection point in the past. At the moment, the 100 SMA also appears to be holding as a near-term floor as well.

By Kate Curtis from Trader’s Way