The title of my last piece covering EUR/USD, entitled EUR/USD Volatility Is Coming, was validated shortly after the publication date of June 30, 2019. The trading day preceding the first one to come after my article is marked with the red line in the chart below (June 28, 2019).
The steep drop that followed has continued into a long slide down to the 1.11 mark (and below). More recently, price has stabilized around 1.11 and is awaiting further feedback.
It is my view that the principal reason for the rise in the first place was the changing yield spreads, as I have previously mentioned here (an article I mention above) and also here. However, despite yield differentials having shown improvement (which favored the euro against certain other currencies), those differentials remained (and continue to remain) negative.
What this means is that it still costs money to hold euros in terms of other currencies. If you open an account with a Forex broker, and buy euros, the probability is high that your carrying interest will be negative. This is because Europe, as a region, is one of the largest issuers of negative-yielding debt globally. Interest rates remain beyond depressed, in negative territory.
Those interest rates feed into short-term borrowing rates. As you can see from data provided by IBORate.com, EUR LIBOR rates are all negative. These are proxies for short-term interbank offering rates. While LIBOR is set to be supplanted by an alternative, we can still use LIBOR rates to understand short-term interbank borrowing rates for certain major currencies like EUR and USD.
As you can see, the overnight, one-week, one-month, two-month, three-month and six-month EUR LIBOR rates are all negative. Interestingly, they are all lower than the ECB's deposit facility rate of -0.40%. Although they have steadied somewhat in recent days, they have all fallen and remain very low.
Below I have used Microsoft Excel to chart the overnight, three-month and twelve-month EUR LIBOR rates over time (over the past 100 trading days):
Perhaps it is no wonder that the euro has felt pressure. The lower these rates go, the more "liquid" the euro effectively is, as the cheaper it is to borrow and use to fund the acquisition of alternative currencies pay you interest rather than cost you. This is what many naive traders forget: long-term currency trends are driven by yield. The euro will not be a bullish currency for a long time for this reason.
Nevertheless, spikes in the euro are occurring, and these are usually driven by short-term improvements in the yield spreads and/or changing sentiment. You could also consider short-term rises as being the result of large corporate transactions providing support. After all, Europe is a large region and there will always be ample demand for euros for real-economy business and investment purposes.
Price action history would suggest the following levels as being key: 1.05893 and 1.14445. These are the tops and bottoms of the rough trading range I illustrate on the weekly candlestick chart below, which persisted from 2015 through early 2017. EUR/USD is apparently making a turn down, back to this trading range (which it has now returned to).
An apparent target, then, is 1.05893 over the next few weeks or months. A rest of the top of this trading range is likely to be sold, however since the top of this range has already been tested numerous times, I find the probability of a retest unlikely at this point.
The most recent weekly candlestick is "Doji" like (see here for an explanation), indicative of a tight intra-week trading range; often a sign of indecision. Nevertheless, any upside retracement is likely to be sold as the euro remains under overwhelming long-term pressure. Note also that the middle of this projected trading range is approximately 1.10169 (indicated below using a Fibonacci tool).
The 1.10169 figure, at the 50.00% retracement level of this author's projected trading range, corresponds almost perfectly this past week's low of 1.10269. Finding a bounce at this level is not surprising, but it is not a sign that the euro is about to bounce significantly higher. A break through this level would, in my view, likely unlock the potential for significant downside.
As shown in the chart below, the 50-week moving average (red line) remains firmly and persistently above the nearer-term 20-week moving average (green line).
While recently the price was able to hit the 50-week moving average in late June 2019, this sent the price significantly lower, and the price is now the furthest it has been in some weeks from the 20-week moving average (green line above). Any further spikes in EUR/USD are ultimately likely to be sold off.
The beauty of Forex is how mechanical price action can behave. Unlike stocks or asset classes which have cash flows you can discernibly project into the future and then discount back to present value, currencies move based on yields, relative purchasing power, sentiment, and price action/geometry.
The above trading range I identified has a 61.80% Fibonacci retracement level indicated at 1.11178. This beautifully aligns almost perfectly (on the daily candlestick chart, if we zoom in) with previous daily lows that have now been broken; see below.
Next week and going forward, EUR/USD may see a little upside, but any modest upside is likely to sell off as EUR/USD makes it way ultimately to the region of 1.05893, which I view as nearly inevitable with time. Please follow me if you would like to receive my updates.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.