The markets have been up and down like a yo-yo this week and it has been difficult to have a clear view of what is strong and what is not. Due to this one the most efficient strategies in this environment is to go with the flow. Don’t stand in front of a moving train, the market is all powerful so it’s better to move with it, use stop losses and protect those profits rather than try any heroics. There are a few indicators that can make navigating the markets a lot easier.
Risky assets are still all moving together. The correlation between EURUSD and the S&P 500 has surged in recent weeks. It was 56% a year ago, back in August it was at 80% and since the start of this month it is up to 83%. Added to this, FX seems to be leading other risky assets. So, on Tuesday we saw the Aussie dollar start to base at the end of the European session, this then trickled down to the euro and the pound, putting further downward pressure on the dollar and eventually stocks had a strong performance in the US session.
EURGBP hourly chart
The same happened this morning. The Aussie and the euro started to strengthen and stocks have since pared their losses. There are some lead signals in FX markets. EURGBP has been stuck in a stubborn range between 0.8900 and 0.8550 since July. This makes sense since both the euro and the pound are considered risky assets so tend to move in the same direction. However, since the euro tends to move before the pound, if EURGBP starts to move higher this may be a lead indicator for other risky assets. The same works for EURAUD since they both reside at the most risky end of FX although the Aussie is considered “riskier” than the single currency. Hence, if you start to see the Aussie gain on the euro, this could suggest a turn higher in risk sentiment.
So what are the signals telling us today- EURAUD has started to gain some ground, so today’s positive sentiment towards risk may be short-lived. Likewise, EURGBP has started to come off its highs. If risk does come back under pressure then support in EURUSD lies at 1.3750 initially (a cluster of daily smas) then at 1.3665 – the bottom of the most recent range.
EURGBP: A risk indicator-