EUR/USD, GBP/USD: Sucked down the gurgler as US bond auctions flop

• US government sees tepid bond demand as it struggles to fund its deficit
• Key inflation numbers from the United States and Europe arrive on Friday
• EUR/USD and GBP/USD sucked lower to pivot points to build trade ideas around

Capital dragged to the big dollar

When the US government is forced to pay up to fund its ballooning deficit, it means it needs to attract capital from somewhere, be it other asset classes or regions. You can see that across markets this week with weak two, five and seven-year Treasury auctions pressuring commodities, credit, currencies, and stocks, seeing money flow into the US dollar. Combined with higher risk-free rates generated by the bond bloodbath, it’s little wonder risk assets are beginning to wobble.

With a less appealing outlook, lower potential investor returns, less dynamism in their local economies, and some obvious bearish technical signals, it’s proven to be a potent mix for the likes of EUR/USD and GBP/USD.

US debt auctions have been poor

After tepid demand on Tuesday as the US Treasury struggled to offload $139 billion in two and five-year Treasury auctions, seeing both tail with bid-to-cover weaker than those seen previously, Wednesday’s seven-year auction of Treasury notes was always going to provide a litmus test for risk appetite now bonds were back on the radar. Would juicier yields bring out the buyers?

The answer was an unequivocal no, with not only the bid-to-cover falling again but another auction tail. If you have no idea what that means, this primer will get you up to speed quickly.

Having largely overlooked the weak auction on Tuesday, focusing instead on the gamma squeeze in Nvidia shares, riskier assets were not so fortunate on this occasion. Make no mistake, this is not great news for markets worldwide. However, it is great news for those seeking volatility. So, yeah. I like it.

EUR/USD back at familiar territory

EUR/USD was a casualty from capital drain towards the US dollar, sucked lower like it was going down the gurgler, suffering the largest decline in months.

On the daily, EUR/USD has found itself back in familiar territory, falling to horizontal support at 1.0800 with the 50 and 200-day moving averages located just below. The pair spent a lot of time here earlier in the month, only on the opposite side of where it sits now.

While the time spend below this zone suggests it may offer solid support, it’s difficult to get enthusiastic about initiating longs right now; multiple failures at 1.0885, Tuesday’s bearish pin, and the obvious evening star pattern generated Wednesday reeks of downside risk. Throw in bearish signals from MACD and RSI and the ducks are lining up for downside.

However, as some would know, technicals is just one filter I use when evaluating setups. With key inflation data out in the Eurozone and United States on Friday, with other second-tier series which have generated volatility in the recent past such as jobless claims out later today, I’m going to let the price action tell me what to do. We have, after all, a very decent level to build some trades around.

For the bears, those considering shorts may want to see EUR/USD close below the 50-day moving average, allowing for the former support zone between 1.0800 and 1.07717 to provide protection. A stop above would do just that. 1.0725 would be the initial trade target, although the uptrend dating back to mid-April may attract some buyers. But the risk-reward would still be unfavorable, meaning traders may want to consider lowering their stop to entry level or extend their trade target to 1.0650 or lower.

Alternatively, should the price manage to hold above 1.0800, consider initiating longs with a stop below the 50-day moving average for protection. 1.0885 would be the obvious trade target. As the case for the bearish trade idea, considering moving your stop to entry should the price move in your favour.

GBP/USD tangoes with 1.2700 again

The setup is similar for GBP/USD with Wednesday’s decline taking the pair back to 1.2700, a level it has tested and probed on multiple occasions this year. With the uptrend in RSI broken and MACD looking like it may soon crossover from above, momentum looks to be shifting lower. With an inverted hammer on Tuesday and evening star pattern generated on Wednesday, the case for shorts looks strong.

But, again, one look at the candle wicks constantly trading through 1.2700 tells you selling initial breaks has been a bad strategy this year. We need to see a close below 1.2700 to get excited about the prospects for a deeper downside flush.

On the downside, bids may be found at 1.2675 and 1.2650, although I’m more interested in 1.2635 given how violently the price retraced lower when tested at the start of May. Given its proximity to the uptrend running from mid-April, that’s a trade target. Below, the price has respected the 50-day moving average on occasion with 1.24500 the next level after that. If we get the close below 1.2700, place a stop above the level for protection.

In the scenario where 1.2700 holds, consider initiating longs with a stop below 1.2675 targeting a push back to key resistance at 1.2800.

-- Written by David Scutt

Follow David on Twitter @scutty