EUR USD another wild ride on the cards

The EUR/USD finished modestly lower last week and has started this one largely unchanged. Although the European economic calendar is far from being excessively detailed, and US markets are closed today, the single currency could still move sharply this week depending on what happens in the stock markets. That’s because of the fact that the euro has been used as a funding currency by some investors wishing to gain exposure to the stock markets without exhausting all of their investment funds – after all, the opportunity cost of investing this way is considerably low as interest rates in the Eurozone are virtually zero. If this view is correct and we see further withdrawal of bullish positions in stocks then one should in theory expect the EUR/USD exchange rate to appreciate.  Conversely, if the stock markets find some much-needed support then this could see the euro head in the opposite direction. That being said though, the inverse relationship between the euro and stocks has weakened somewhat, as shown by the comparison chart of the EUR/USD vs. DAX, below in figure 2.  That’s probably mainly because of the dollar remaining resilient due to growing expectations about a 2015 Federal Reserve rate increase, which is keeping the gains in check for both the EUR/USD and stocks. Another reason for the weaker correlation is that there is so much the unwinding of the carry trades that could support the euro.

Nevertheless, the correlation is still there and given the Chinese investors are back after a short break last week, coupled with increased uncertainty about the Fed’s next policy move with the key FOMC meeting looming next week, the stock market volatility could remain high, which is music to the ears of FX traders.

From a technical point of view, the EUR/USD has arrived at another key juncture and what happens here could determine the direction for the next several days. As can be seen from the daily chart, in figure 1 below, price found some decent support at the end of last week around 1.1080/90. This is where the 50-day moving average converges with the 50% retracement level of the entire rally that began in March. Meanwhile, the backside of the broken bearish trend line also comes into play here.

Thus, for as long as the bulls hold their ground above here, we may still see price stage a notable recovery in the coming days. For the bullish trend to materialise though, price will first have to break short-term resistance around 1.1200. If seen, the bulls may then aim for the 200-day moving average, currently at just below 1.1270, as their next target. Further resistance is seen around 1.14000, which was formerly resistance and support.

However a breakdown of the above-mentioned 1.1080/90 support area would at least target the next horizontal support at 1.1020 and possibly the bullish trend line or even the 61.8% Fibonacci retracement level at 1.0940. The EUR/USD’s potential move lower could accelerate if the stock markets manage to find some support.