EURUSD has Quietly Gone Bid this Week

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, US 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 come off so much 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^th (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 written about, 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^st lows to the December 31^st 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.

Source: Tradingview, FOREX.com

On a 240-minute timeframe, EUR/USD has retraced from the January 31^st highs to the February 20^th 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 mentioned 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^ST -Feb 20^th 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 absence of large economic data discrepancies, the value of EUR/USD is likely to be driven by stocks. And as we have been over the past few days, the value of stocks has been driven by the coronavirus.

StoneX Europe Ltd makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. We are not under any obligation to update any such material. Any opinion made may be personal to the author and may not reflect the opinion of StoneX Europe Ltd.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Please ensure you fully understand the risks involved by reading our full risk warning.

FOREX.com is a trading name of StoneX Europe Limited, and FOREX.com/ie is a domain operated by StoneX Europe Ltd, a member of StoneX Group Inc. StoneX Europe Ltd, is a Cyprus Investment Firm (CIF) company registered to the Department of Registrar of Companies and Official Receiver with a Registration Number HE409708, and authorized and regulated by the Cyprus Securities & Exchange Commission (CySEC) under license number 400/21. StoneX Europe is a Member of the Investor Compensation Fund (ICF) and has its registered address at Nikokreontos 2, 5th Floor, 1066 Nicosia, Cyprus.

StoneX Europe Limited is registered with the German Federal Financial Supervisory Authority (BaFin). BaFin registration ID: 10160255

FOREX.com is a trademark of StoneX Europe Ltd, a member of StoneX Group Inc.

The statistical data and the awards received refer to the Global FOREX.com brand.

This website uses cookies to provide you with the very best experience and to know you better. By visiting our website with your browser set to allow cookies, you consent to our use of cookies as described in our Privacy Policy.

Through passporting, StoneX Europe is allowed to provide its services and products on a cross-border basis to the following European Economic Area ("EEA") states: Austria, Bulgaria, Croatia, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden.

Additionally, StoneX Europe Ltd is allowed to provide Investment and Ancillary Services to the following non-EU jurisdiction: Switzerland.

StoneX Europe Ltd products, services and information are not intended for residents other than the ones stated above.

Tied Agent Information: KQ Markets Europe Ltd with Company No. HE427857.
Address: Athalassas 62, Mezzanine, Strovolos, Nicosia Cyprus.
Services Provided: Reception and Transmission of Orders.
Commencement Date: 06/12/2022
Website: KQ Markets - CFD Trading | KQ Markets

We may pay inducements, such as commissions or fees, to affiliates or third-party introducers for referring clients to us. This is in line with regulatory guidelines and fully disclosed where applicable.

StoneX Europe Ltd may make third party material available on this website which may contain information included but not limited to the conditions of financial markets. The material is for information purposes only and does not contain, and should not be construed as containing, investment advice and/or investment recommendation and/or an investment research and/or an offer of or solicitation for any transactions in financial instruments; any decision to enter into a specific transaction shall be made by the client following an assessment by him/her of their situation. StoneX Europe Ltd makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. We are not under any obligation to update any such material. Any opinion made may be personal to the author and may not reflect the opinion of StoneX Europe Ltd.