CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 81.76% 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.
Pepperstone logo
Pepperstone logo

Analysis

EUR

EURUSD - Where the near-term balance of risk in resides

Chris Weston
Head of Research
Aug 17, 2022
The EURUSD daily chart comes up on the radar, as does EURCAD, and I see real risks this goes on to test the range lows of 1.3020, where a downside break would be my base case for a continuation of the bearish move we saw in February to June.

EURUSD has worked well within the bearish regression channel (I’ve just used two standard deviations of the line of best fit) drawn from the Feb highs. We saw an intraday break of that channel on 10 and 11 Aug, with price immediately finding supply off the May swing low - with the ensuing move taking price through the rising trend or what appears looks like a bear flag, again a continuation pattern.

Preview

We find support into the 61.8% fibo of the 0.9952 to 1.0364 rally at 1.0211 – this coincides with the consolidation lows seen on 27 July – So a break here would give me confidence that we’re due to revisit parity. Momentum indicators (on the daily) suggest the skew of probabilities suggest moves to the downside, although the options market gives us limited insight here with EURUSD 1-week ‘skew’ trading at a -0.97. Essentially, this prices put option implied volatility at a slight premium to call volatility, meaning the market on balance says if we are to see a move it would be more powerful to the downside. 

We are seeing US 10yr real rates (10yr Treasury adjusted for expected inflation) sitting at a 172bp (or 1.72%) premium vs German real rates, and that is supporting the USD. We also see EU Nat Gas prices trading EUR225 and while we did see that off the highs of EUR251 yesterday, if this keeps making higher highs then the EUR will suffer – especially in an environment where the ECB is widely expected to hike by 50bp in its 8 Sept meeting – it’s almost as though we need to become watchers of the water levels in the Rhine to see how EU NG prices fare as if we see a new one-way trend in NG prices and the EUR should attract sellers.

EU 5y5y swaps (tradeable inflation expectations) are holding up well at 2.07% and while US 5yr inflation swaps sit at 2.49%, both are moving in lockstep – should a trend develop and one moves higher or lower vs the other, then it will impact the exchange rate. For now, while both are holding in its suggest both central banks will look to hike further, but from a relative economic sense the US is in far better shape – this suggests downside risk in EURUSD.

Near-term, in the session ahead we get US retail sales, although we’d need a beat beat/miss to move the dial too intently. Looking forward, the key risks and the marquee dates for trading EURUSD are:

  • Jackson Hole Forum 25-27 August – see the event run sheet here - https://www.kansascityfed.org/research/jackson-hole-economic-symposium/macroeconomic-policy-in-an-uneven-economy/
  • 2 Sept - ISM manufacturing & US payrolls
  • 8 Sept - ECB meeting
  • 13 Sept - US CPI
  • 21 Sept – FOMC meeting

The material provided here has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Whilst it is not subject to any prohibition on dealing ahead of the dissemination of investment research we will not seek to take any advantage before providing it to our clients.

Pepperstone doesn’t represent that the material provided here is accurate, current or complete, and therefore shouldn’t be relied upon as such. The information, whether from a third party or not, isn’t to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product or instrument; or to participate in any particular trading strategy. It does not take into account readers’ financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of Pepperstone, reproduction or redistribution of this information isn’t permitted.