Why is EUR/USD so boring?

<p>EUR/USD is the world’s most traded currency pair, yet it has barely moved in the last couple of months. What is even stranger is that […]</p>

EUR/USD is the world’s most traded currency pair, yet it has barely moved in the last couple of months. What is even stranger is that the lack of movement is not down to a lack of drivers: Greece nearly faced an exit from the Eurozone not that long ago and the prospect of a Fed rate hike next month is a key theme for markets right now. These factors should have made this pair particularly sparky over the summer months, but instead volatility has dropped and EUR/USD has taken over the mantle as the wallflower of the FX world.

To put the staid performance of EUR/USD into some context, this pair has traded in a 1.08 – 1.11 range since June, with the bulk of trading around the 1.10 figure. EUR/USD seems to be trapped between its 50 and 100-day smas, even though volatility has picked up elsewhere.

3 reasons why EUR/USD is the wallflower of the G10 FX world:

1, Eurozone economic data:

Greece and its creditors buckled and eventually agreed on a bailout last month, added to this, the Eurozone has seen an improvement in its economic data of late, Greece pulled out of recession in Q2 and the trade balance has been picking up, the trade surplus for June rose to EUR 21.9bn, which is a 2.8% rise on the month, with exports rising by an impressive 1.4%. This contrasts with the US, which saw its trade deficit widen in June by over 7% to a whopping $42.8bn. Traditionally, currencies with surpluses and strong economic fundamentals outperform those with deficits. This is not always the case, but it appears that weakness in the EUR over the last 18 months is starting to boost the Eurozone trade figures, which could have a stabilising impact on the currency in the coming months.

2, Volatility elsewhere

Volatility levels have been higher elsewhere, for example in the AUD, CAD and NZD vs. the USD, and in commodity prices. The Bloomberg commodity index plunged to its lowest level since 2002 earlier on Tuesday. This is where the action has been in financial markets in recent weeks; hence the slow-moving EUR has been a less attractive choice for traders, particularly short-term traders.

3, Fed uncertainty

We have mentioned before that economists and the market seem to be at odds on whether to expect a rate rise from the Fed next month with economists pricing in a near 90% chance of a hike and the market only pricing in a 50% chance (according to Fed Funds Futures). It appears that EURUSD traders may be following the Fed Funds Futures route, and being more cautious on the prospect of a US rate rise in the coming weeks. This could also be a key support for EUR/USD right now.

Looking ahead, if the Fed does hike rates then we could see some weakness in EUR, however, we believe that there could be a greater chance of weakness in other, more fragile economies than the Eurozone right now, including the Aussie and the NZD, which are also battling headwinds from China. If the market’s intuition is correct and the Fed holds off from raising rates then we could see EUR/USD break out to the upside above 1.1150, which opens the way to 1.14 and potentially to 1.15 in the medium-term.

Build your confidence risk free
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.