Currency Pair of the Week: EUR/USD
Joe Perry June 8, 2020 3:42 PM
Will this run continue or is it time for a correction?
The EUR/USD has had quite a run over the last few weeks, trading from a low of 1.0800 on May 18th to a high of 1.1385 on Friday. Will this run continue or is it time for a correction?
Last week, stimulus continued in Europe as the ECB increased PEPP by 600 billion Euros and said they would extend the program through 2021 and would reinvest the maturing principal until the end of 2022. In addition, Germany agreed they would add in another 130 billion Euros to their stimulus funding. Also, 2 weeks ago, the EU proposed additional and revised language to the France/Germany proposal, which included 500 billion Euros in grants and 240 billion Euros in loans. With huge supply of funds, logic would suggest that the Euro should be lower.
The economic data has not been kind to the Euro either. Just looking at Germany alone, one may expect the Euro to be lower. Germany reported a 26% drop in April factory orders on Friday (EUR/USD did actually trade lower that day.) And as recently as today, industrial output was worse than expected, coming in at -17.9% vs -16.8% expected. In addition, UK/EU Brexit talks have stalled, which is also not supportive for the Euro.
However, there is one caveat that has been overlooked so far here, and it is that of the tremendous weakness of the US Dollar! As we discussed in the chart of the week in the week ahead report, the US Dollar Index and the S&P 500 have a -.94 correlation coefficient, meaning that the DXY and the S&P 500 trade inversely with each other 94% of the time! As the Euro makes up a majority of the DXY index, it makes sense that the Euro would also trade in the opposite direction of the DXY. Therefore, stocks and EUR/USD have a high positive correlation and trade together a majority of the time. So, as the S&P 500 goes, so does EUR/USD.
In addition, the Fed meets on Wednesday. As with all central bank meetings lately, the key to determining if the EUR/USD continues its move higher will be to see if the Fed is still in extreme dovish mode. Remember, the ECB is already in negative rate territory while the Fed has rates at 0%. So, who has more room to lower rates if needed? The Fed. And if the Fed goes negative, the US Dollar will weaken, and EUR/USD bid will continue.
Technically, we can see on the daily EUR/USD chart below that the correlation coefficient between the EUR/USD and the S&P 500 is indeed high, at +.96. Price traded out of the symmetrical triangle and moved aggressively towards the 161.8% Fibonacci extension from the highs on March 30th to the lows of April 24th, near 1.1400. The RSI turned lower on Friday, however, still remains in overbought territory. There may be some profit taking or unwind from the trade ahead of the FOMC meeting on Wednesday.
Source: Tradingiew, Forex.com
On a 4-hour timeframe, EUR/USD has been in a strong upward channel since May 25th. Last week, the pair had a false breakout above the top of the channel and traded back into it. First support is at the bottom of the channel near 1.1300. If price breaks below the channel, the next support is horizontal support near 1.1150, where buyers may be aggressive to buy the dip. If price moves higher, initial resistance is Friday’s highs near 1.1400 and then the highs from early March near 1.1495.
Source: Tradingiew, Forex.com
The next move in EUR/USD will depend on one of two things: 1) Stocks: with such a high correlation at the moment, if stocks turn lower, EUR/USD is likely to follow 2) The Fed Interest Rate Decision on Wednesday: depending on the degree of dovishness, it could affect the US Dollar, which is turn will affect the Euro. In addition, watch for potential profit taking ahead of the FOMC meeting on Wednesday!
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.