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

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.

FOREX 10

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.

Learn more about forex trading opportunities.


Build your confidence risk free

More from Forex

Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.