Please allow a few market structure comments as I wait for new data to report EUR. A few wrote to ask about comments from Brother Dale regarding his views of a far higher EUR to come. Brother Dale spoke about levels 1.1700’s, even 1.2000’s and higher. I thought if I explain the current structure, maybe that would help many understand what’s going on.
As two most widely traded currency pairs, EUR/USD is at severe oversold extremes while USD is at its severe overbought extremes. Neither story is earth shattering since we’ve lived in this environment for many many months. All Cross pairs trade in the middle of this battle, aligned dead center between EUR/USD and DXY. What we could use desperately is a higher EUR and lower USD so trends and trades can be taken with a bit more confidence. I don’t believe we will see it anytime soon. Why.
The Fed is working feverishly hard to lift Fed Funds rates higher. So far so good at least from 0.06 to now 0.13 and 0.14. The overall goal is an interest rate increase. The promise of an interest rate rise and current slow rise of Fed Funds ensures DXY remains at either current or higher levels yet it also remains severely overbought. Only disaster or the Fed backs off on the interest rate rise drops DXY. From DXY current 97.00, much support exists below at 93, 92, 88. Any move lower from current levels is just a correction unless 93 and 92 is taken out. Then the correction becomes much deeper.
The ECB is not backing off on negative Deposit rates, a policy adopted since September 2014. With such a far divergence between negative deposit rates and FED funds rising, the far extremes between EUR and DXY appears to be here for a long while in the future. Any EUR moves higher is a correction in a downtrend while DXY dips are its own correction in a trend headed higher. The current picture looks like this 0.13 V negative 0.116 as of this morning. This isn’t divergence, this is sickly wide extremes.
In the middle area where cross pairs trade and between EUR and DXY extremes lies USD and German Bund yields. German bund yields are sitting listless not overbought or oversold yet not moving anywhere. USD yields are oversold from the 2 and 10 year. Oversold means those yield trends higher are just getting started. That holds DXY either in present location or higher. Even a dip in USD yields has plenty of supports. USD and DXY are the dictators of the future of the next leg in prices. Its up to Big Sis Yellen to move one way or another. As traders, if one feels Yellen doesn’t raise as promised, EUR/USD flys higher and DXY as well as yields dips severely. Why EUR and DXY. Both share an exact opposite in their relationship. EUR was derived from the Silver tradition while DXY is a Gold standard currency. Both will always remain at a fire and ice relationship. If Europe prospers, USD falters and vice versa. Its the nature of the world and in place since oh about 1500’s. But note how German and USD yields are dead center. Short term, hardly a separation exists as both USD and German yields correlate V each other and the EUR/USD. This situation needs a breakout. It means DXY and EUR prices meander. Up 100, down 100 type situation. As long as yields remain deadlocked V EUR/USD and DXY, prices don’t trend. They meander around listless. If EUR/USD is viewed Vs its 28 pair counterparts, every pair correlates. Hear this, every pair correlates. So EUR pairs are also in a correlation logjam. USD and German yields aren’t supposd to correlate Vs each other. They move opposite each other. But today they are not. It locks up further our prices.
EUR/USD on the way down broke 5 year, 10, 14, 16, 20, 25, 35, 45 and 50 year averages. This is almost unheard of in currency markets to my knowledge and at least going back to 1998. The closest major average to current prices when last I ran the data was 1.1100, 1.1200 and 1.1400. The 1.1400 point is now 1.1078 and dropping slowly. Its been months since I ran the data so I won’t comment where the remainder averages are located because I don’t know. Next major average above is the 16 year average at 1.2215. That I believe is the big line Dale was viewing this morning. To see 1.2215, point at 1.1631 must break higher. The price goes to no man’s land between 1.1631 – 1.2215. But Dale also mentioned 1.1450’s as line in the sand to see 1.2215. That’s not correct. 1.1400’s contain 1.1421, 1.1477 and 1.1490. These points are found within just the major averages 5, 10, 14 and 16. But is 1.1400 the line in the sand. Nope. I outlined every point on the way to 1.2215. Pretty much every point.
1.1041 ( 100 Day), 1.1067, 1.1076, 1.1082, 1.1102, 1.1137, 1.1230, 1.1251, 1.1323, 1.1331, 1.1421, 1.1477, 1.1490, 1.1565, 1.1607, 1.1631, 1.1649, 1.1709, 1.1752, 1.1802, 1.1855, 1.1935, 1.1969, 1.2016, 1.2149, 1.2215. From 1.1041 to 1.2215 is still 1.1628 halfway point. 1.1400’s if seen is just a longer correction in the overall downtrend and doesn’t signal that 1.2000’s are in the cards. If 1.1600’s ever broke above then I would consider a larger correction is on the way.
EUR/USD points next
Brian Twomey, Inside the Currency Market, btwomey