EUR/USD and 5 Day Rule: Levels, Ranges, Targets

 

 

 

The question to the 5 day – interest rate change rule in currency markets was to what degree was the failure and its answered by total collapse as a vast majority of currency pairs remained inside a 100 pip range. The 5 day Rule derives from currency markets in periods 1900’s to late 1930’s and then from 1970’s to current day. As expected and mentioned, NZD as usual wins the volatility day but EUR, CHF, JPY, AUD and the list of failures goes on. Even wide ranging EUR/AUD and EUR/NOK failed. EUR/NOK traveled 1000 pips but its allowed 500 pips of movement on any given trading day.

The manner to view the 5 Day Rule outside of national interest rates is the number of exchange rates trading at parity against each other. The world of exchange and interest rates grew deeply closer to each other over the years since crisis days. This explains why the 5 day rule failure and a paltry 100 pip range on a 25 basis point interest rate change. What’s 25 basis points inside a USD Vs EUR corridor of 50 basis points. It doesn’t register on the radar screen yet it speaks volumes to economic and central bank failure continuously over 8 years.

A marriage continuation in interest and exchange rates from a trading perspective confirms the need for a robust technical strategy. An ECB interest rate rise for example ensures Corridors remain and EUR/USD may trade 1.1300 to 1.1500 instead of 1.1100 to 1.1300. Interest rates badly need a break out in order to break the dead ranges but its not seen yet. The economic portion must lead interest and exchange rates rather than Yellen’s backward approach as interest rates lead economics. Not sure Keynes would approve of such an approach.

Further how markets found this dead range / Dead 5 day rule problem was the strict focus to protect interest and exchange rate bottoms as first priorities. GBP as an example landed inside the BOE’s 1.2300 to 1.2800 range and the result is UK money markets went dead and numb which means this range may hold for a while as bottom points are seen from 1.2639 to middle 1.2700’s. Focus on bottoms and protections questions the overall positive economic intent.

GBP/USD above targets are located at 1.2747 and 1.2796. Bottoms must break 1.2678 to see a lower GBP.

EUR/USD will severely struggle at 1.1224 so topside is seen at 1.1196. Bottoms will severely struggle at lower 1.1100’s.
AUD/USD Do or Die at 0.7528 and 0.7534.

USD/JPY must cross 111.52 to travel higher while 110.96 is current solid supports.

 

Brian Twomey

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