EUR/USD Has Quietly Gone Bid This Week
Joe Perry | Feb 26, 2020 03:57PM ET
The last few days have been the most volatile since Q4 2018 for stocks. Many world indices have given up 2020 gains (some from all-time highs) and are currently trading lower for the year. With stocks moving lower, one currency pair that has been quietly moving higher is the EUR/USD.
In a time long ago before negative rates, U.S. stocks and EUR/USD moved together. However, once the ECB lowered rates into negative territory, the euro became a funding currency. This is known as a “Carry Trade.” People borrow euros at negative rates and buy riskier assets (this has been done with yen for years, which is why USD/JPY and the S&P 500 often move together). However, now that stock markets have been hit over recent days, people who are selling stocks (the riskier asset) need to buy back euros (the funding currency). The is know as “Unwinding of Carry Trade.”
Notice on the chart below that since the beginning of February, as stocks have been grinding higher, EUR/USD was moving lower. On February 20 (green vertical line) the correlation coefficient was -.90. For reference, a correlation coefficient of -1.00 is a perfectly negative correlation, meaning the as stocks move up (or down), EUR/USD moves down (or up) in lockstep. (Although the correlation coefficient has been moving higher the last few days, it is still negative. The fact that it is increasing just means that stocks have been moving lower at a faster pace than EUR/USD has been moving higher.)
Source: Tradingview, CME, FOREX.com
As a reminder, EUR/USD has been trading in a falling wedge since mid-2018. After a failed attempt to break higher out of the wedge this year, price formed a head-and-shoulders pattern and broke back into the wedge, reaching the head-and-shoulders target. As we have often noted, if price fails to break out of one side of a pattern, it often tests the other side. This is precisely what happened here as EUR/USD traded down near the bottom trendline of the falling wedge and the 127.2% Fibonacci extension from the October 1 lows to the December 31 highs near 1.0780. The pair bounced over the last few days to previous support (now acting as resistance) near 1.0880 as stocks sold off. This also allowed for the oversold RSI to move back into neutral territory.
Get The News You Want
Source: Tradingview, FOREX.com
On a 240-minute timeframe, EUR/USD has retraced from the January 31 highs to the February 20 lows to the 38.2% retracement level near 1.0900, forming a flag pattern. The target for the pattern, if it breaks lower from here, is near 1.0600. However, price must pass through support near 1.0780 and two channel trendlines (on the daily) and the 161.8% Fibonacci extension from the Sept.-Dec. timeframe (on the daily chart) to reach that level. Resistance above at recent highs near 1.0900. Above there is horizontal resistance and the 50% retracement from the Jan. 31 -Feb. 20 timeframe near 1.0940/50, and then horizontal resistance near 1.1000.
Source: Tradingview, FOREX.com
Today’s candle on a daily chart is currently a doji, or candle of indecision. As long as the ECB keeps rates negative, the euro will be used as a funding currency. In the near term, in the absence of large economic data discrepancies, the value of EUR/USD is likely to be driven by stocks. And as we have seen over the past few days, the value of stocks has been driven by the coronavirus.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.