By Fast Brokers – The pullback in the EUR/USD is faring worse than we expected. The currency pair is sinking quickly below our 1st and 2nd tier uptrend lines and is currently headed towards previous August lows. The EUR/USD’s brisk decline is part of a broad-based appreciation of the Dollar in reaction to better than expected employment data from the U.S. The Dollar’s broad strength is confirmed by a breakout in the USD/JPY. The currency pair is normally dormant, so today’s movement should be on everybody’s radar. The fact that the EUR/USD isn’t rising on the news is suspicious, and raises a red flag. Yes, German Industrial Production missed expectations this morning, but one discouraging data point surely isn’t enough to send the EUR/USD tumbling like this. The Industrial Production number is simply heightening the pullback. So what message is the EUR/USD sending? Are we witnessing a shift in correlation between the Dollar and U.S. equities? While it’s certainly too early to make any conclusions, the discussion is at least warranted.
We can derive a few reasons behind today’s rapid appreciation of the Dollar in the wake of encouraging U.S. employment data. Either we are witnessing a reversal in correlation, or the EUR/USD is indicating a sizable pullback in U.S. equities. The answer could come from the S&P’s reaction as holds strong just above its highly psychological 1000 level. A reversal in correlation could be a key development. This would indicate investors believe the U.S. economy should outperform both the EU and Britain on a fundamental basis. Since the large pullback in the EUR/USD comes in reaction to much better than expected U.S. data combined with recent disappointing EU data, the reversal in correlation is a more plausible argument. However, like we said, it’s too early to jump to any conclusions about today’s movement. The positive correlation between the Dollar and U.S. equities could just be out of whack today with a return to normalcy next week. We will have to wait and see how U.S. equities behave in relation to the Dollar over the next few trading sessions.
Meanwhile, today’s decline in the EUR/USD comes on large sell-side action, indicating there is weight behind the movement. Despite today’s deterioration, the EUR/USD still has our 1st tier uptrend line and August lows to fall back on. If these cushions don’t hold, the currency pair can rely upon the bottom of its 7/20-7/28 trading range with the psychological 1.40 relaxing in the distance. Investors will need to keep a close eye on the EUR/USD as well as the S&P futures to see where the currency pair can bottom and build a new base.
Present Price: 1.4233
Resistances: 1.4252, 1.4278, 1.4294, 1.4324
Supports: 1.4225, 1.4214, 1.4200, 1.4168, 1.4152
Psychological: 1.40
Market Commentary provided by Fast Brokers.
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