EUR/AUD, GBP/AUD: AUD tailwinds driving fresh bearish pressure

• Chinese assets and commodities pushing AUD higher
• RBA cuts less likely as consumer-led growth surprises
• EUR/AUD focus on 1.7675 into ECB decision
• GBP/AUD testing 2.0450 after closing beneath 200DMA

AUD Outlook Summary

Booming Chinese markets, firmer commodity prices and a noticeable decline in the scale of further rate cuts expected from the Reserve Bank of Australia have combined to spark a large bearish unwind in EUR/AUD and GBP/AUD over the past month, leaving both pairs threatening to break to fresh lows. With looming rate cuts from the Federal Reserve acting to boost sentiment towards the global economic outlook, tailwinds for cyclical assets such as the Australian dollar may find room to strengthen yet.

AUD a China Proxy Play

The first chart showing correlation coefficient scores between EUR/AUD and GBP/AUD with a variety of markets and indicators gives a strong sense of what’s been influencing both pairs over the past month: Chinese markets, commodity prices, along with rate differentials bubbling away in the background. From top to bottom, we have USD/CNH in yellow, CSI 300 futures in red, SGX iron ore futures in green, two-year and 10-year yield spreads in black and blue respectively (Germany used as a proxy for risk-free EUR rates), along with Bloomberg commodity index futures in grey.

Source: TradingView

Correlation scores run from -1 to 1, showing how closely two assets move together. A score near 1 means they move in sync, -1 means they move in opposite directions, and 0 means no clear relationship. Correlation doesn’t equal causation, but in this instance, the strength of the relationship with Chinese and China-linked markets is clearly a driver of recent moves. There’s been a long-standing positive correlation between AUD and offshore traded CNH, while AUD has also benefitted at times when Chinese equities have outperformed. As a major commodity producer, firmer prices provide another tailwind.

Another factor has been a pick-up in the Australian economy led by consumers, casting doubt on the need for the RBA to cut rates further. With comparatively low levels of net government debt, Australia is also less exposed to fiscal risks faced in Europe, such as the UK and France. Combined with geopolitical uncertainty, the economic outlook between Australia and Europe is diverging, helping fuel AUD strength.

EUR/AUD Downside Risks Grow

Source: TradingView

EUR/AUD has been trending lower having topped out at 1.8150 in late August, taking out several support levels and the 50-day moving average along the way. The pace of the unwind has accelerated following the break of 1.7800 earlier this week, leaving the pair perched just above the July swing low of 1.7675. That now becomes a key level when assessing fresh trade setups heading into the European Central Bank (ECB) September interest rate decision later Thursday.

Both RSI (14) and MACD are providing clear, strengthening bearish momentum signals, favouring a similar directional bias. As such, if we see a clean break of 1.7675, minor levels below such as 1.7630 and 1.7600 may be quickly overrun, putting more defined support levels such as 1.7465 and 1.7400 on the radar. Should 1.7675 hold, 1.7800 and the August 21 downtrend offer the first topside tests of note.

Regarding the ECB, while no change in the deposit rate is expected, there is a risk that updated growth and inflation forecasts come across as dovish given headwinds from a firmer euro and political and geopolitical uncertainty. Such an outcome would likely amplify downside risks for EUR relative to AUD.

GBP/AUD Breaks Beneath 200DMA

Source: TradingView

GBP/AUD also finds itself in a well-defined downtrend with momentum indicators flashing increasingly bearish signals, making the first close beneath the 200-day moving average since November 2024 on Wednesday all the more interesting for shorts.

With a bearish bias favoured, 2.0450 now looms as an important level given the pair has found support here frequently in the recent past. If the price can meaningfully break beneath the level, shorts could be established with a stop above for protection, targeting 2.0300 initially. If 2.0450 holds again, a reversal back above the 200DMA and August 20 downtrend would shift directional risks sideways to higher, paving the way for long setups to be considered. But, for now, the pair is very much as a sell on rallies/bearish breaks play.