Trader thoughts - the conflicting forces dictating EURUSD flow

Certainly, if I look at relative settings in the German and US bond and rates market, one could make an argument that ‘fair value' for EURUSD is above 1.1000. Germany’s biggest trade union pushing for 7-8% wage increases pushing up German bond yields, which has increased the EUR valuation a touch.

Still, it’s hard to buy the pair with any conviction outside of a scalp or day trade given the USD is the primary hedge against further equity drawdown – so if the US500 and NAS100 take another turn lower and the VIX pushes towards 35% then EURUSD will likely head back towards 1.0400 and below – conversely, if we are to see an oversold equity market rally of 2-4% then EURUSD should take out last week’s high of 1.0601 – consider in this scenario the AUD, NOK and CAD are going to be a better long though as they have a far higher sensitivity to equity market returns.

(Source: Pepperstone - Past performance is not indicative of future performance.)

For traders wanting to express a bullish view on the EUR – EURJPY seems the play, but much now sits with the ECB hiking and keeping peripheral bond yields in check – notably the differential between Italian 10yr bond yields over German bund is widely watched as a guide of EU stress and this has been the centre of attention - we’re yet to fully understand how the ECB will contain peripheral spreads – the idea being if the yield spread pulls above 200bp (2%) then this should put downside pressure on the EUR regardless of the ECB hiking in July. One to watch, and for those wanting to set this up on TradingView the code is TVC:IT10Y-TVC: DE10Y.

(Source: Pepperstone - Past performance is not indicative of future performance.)

There's many crosscurrents impacting EURUSD and as so often is the case when there's conflict in the fundamentals the price action and set-up on the 4-hr and daily proves to be range-bound – we see that now and the charts suggest the higher probability of playing a 1.0350 to 1.0800 range over the near-term. So, I'm watching Italian yields and equity markets as the driver – happy to play the range or revert to the crosses where we can see better-trending conditions.