One of the first things that most new traders learn is that currency values fluctuate based on a country’s interest rates, or more accurately, interest rate expectations.
While there are many other factors in play, a trader who can determine the path of global central bank interest rates is in a good position to predict the longer-term path of the underlying currencies. As any experienced trader knows, markets are rapidly evolving and rarely stick to a simple, straightforward narrative for long, which is why it’s reassuring to observe the EUR/AUD’s price action thus far this year.
Heading into the year, the European Central Bank had recently cut interest rates, but most market watchers assumed that the bank would stay on hold until after its another round of bank stress tests, dubbed the Asset Quality Review (AQR).
Meanwhile, the RBA was widely expected to cut interest rates to support its struggling economy and job market. Over the last six months though, the ECB has been forced to cut interest rates and introduce a bevy of stimulus measures, while the RBA has shifted to a decidedly neutral posture. Therefore, it’s not surprising that the EUR/AUD has generally ratcheted lower over the last six months.