Why EUR/USD could catch a bid toward 1.2200 on month-end flows

Matt Weller
Escrito por : ,  Jefe de Investigación de Mercados

Traders often discuss how “month-end flows” may impact a currency or a currency pair during the last few days of the month. These flows are caused by massive institutional portfolio managers rebalancing their existing currency exposures and hedges.

If the value of one country’s equity and bond markets increases, these asset allocators typically look to sell or hedge their elevated risk in that country’s currency and rebalance their exposure back to an underperforming country’s currency. The more severe the change in a country’s asset valuations, the more likely portfolio managers are either under- or over-exposed to certain currencies.

Of course, month-end rebalancing flows are just one of countless factors driving currency performance at any given time, but they can become particularly impactful in the final week, day, and especially couple of hours heading into the 11am ET fix on the final trading day of the week.

For this month, sophisticated bank models are pointing to relatively large month-end selling flows in the US dollar, and looking at the month-to-date performance of major stock market indices, it’s not hard to see why:

Index

Underlying Currency

Month-to-Date Performance

S&P 500

USD

+ 5.4%

S&P/TSX Composite

CAD

+ 2.4%

FTSE 100

GBP

+ 3.7%

DAX

EUR

+ 1.9%

ASX 200

AUD

+ 3.9%

Nikkei 225

JPY

- 0.2%

Though a more comprehensive analysis would also consider bond market performance, it’s clear that many global asset allocators could be overexposed to US assets and looking to sell after a torrid rally so far in April. My colleague Joe Perry has already penned his deep dive “Currency Pair of the Week” piece on USD/JPY, which could see some of the most month-end selling pressure, but EUR/USD is also a candidate to watch.

Looking at the chart, EUR/USD has been on a strong rally since the last day of March, adding nearly 400 pips trough-to-peak over the last four weeks. That said, there’s little in the way of previous resistance until the late January and February highs in the 1.2175 range, and the shorter-term 21-day EMA has just crossed above the medium-term 50-day EMA for the first time in 11 months, potentially hinting at a new uptrend in the weeks to come:

Source: StoneX, TradingView

With the potential for month-end rebalancing flows to support EUR/USD, the bias for this week will remain to the topside as long as the pair can hold above previous-resistance-turned-support at 1.1990.

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