EURUSD is tracking a range of 1.2000 to 1.1850 (white shaded area), with the 200-day MA supporting – the 5-day EMA is moving perfectly sideways, and the 20-day MA is also about to start moving sideways. We see stochastic momentum and the 14-day RSI at mid-range, while EURUSD 1-week option implied volatility sits at a lowly 5.91% – the 17th percentile of the 12-month range, implying a daily move of 59-pips.
This is about as neutral a set-up on the daily timeframe as we’re likely to see. I guess one can put a Bollinger band on the chart and play this from a mean reversion strategy. However, the fact is the market has hit a fair value and when there is conflict and disagreement, and the market is unable to form a consensus then we see range trading come into its own – which is the case now.
When EURUSD breaks and starts to trend then this should be respected, but as is generally always the case, let the market push the trade.
When fundamentals marry with technicals
The fundamentals are incredibly conflicting and its easy to see why EURUSD tracks sideways.
EURUSD negative (USD positive)
- Relative growth differentials – It seems likely the US economy grows in the high 6% level this year and possibly above 5% in 2022. European GDP is expected to print 4.2% this year and 4.1% in 2022, respectively.
- Real rates – In the bond market, we see US 10yr real (adjusted for inflation expectations) Treasury yields at a 91bp premium to German bunds, which we use as a proxy of Europe. A push above -60bp in real Treasuries (https://fred.stlouisfed.org/series/T10YIE) should prove to be a USD positive.
- Interest rate differentials favour long USD positions with US interest rates pricing three hikes by 2023 and 7.5 hikes by 2026. No hikes are expected in Europe.
- The vaccine roll-out is arguably more efficient in the US, with Europe having delivered 58,4m doses vs 130.3m in the US.
- Europe’s third wave of lockdowns will impact EU economics – should the US be concerned about a new COVID wave hitting the US before the vaccine is fully administered?
- The market has reduced its net long position (source: CFTC report), but at 89k contracts EUR longs are still one standard deviation of the 10-year average.
EURUSD positive (bearish USD)
- European investors can buy US Treasuries and with the additional yield achieved from 3-month hedging rates they can enhance returns and achieve a yield of 2.46%. This means selling USDs and buying EURs.
- The US Treasury Department are drawing down the cash they hold in the Fed’s Treasury General Account (TGA), which is acting as a liquidity boost and weighing on the USD. Ultra-short-term US rates have reacted, with 1-month Treasury bills at 0% and even traded negative last week.
- European equities are outperforming US equities – Europe seems to be the value play
- The market broad positioning in the CFTC report (non-commercials) may be long EURs, but the leveraged/fast money community are now running a progressively EUR short position.
Weighing all these forces together, on a net basis one can make a case that perhaps the EURUSD should be weaker than it is and through the 200-day MA. That said, markets are forward looking and absorb and aggregate all capital flows, so the fact EURUSD is not weaker despite these USD tailwinds is of clear interest. When we have such complicated forces, all competing for influence sometimes its easier just to watch price and wait for the move, as when it comes it could be highly influential.