EURUSD is the world’s most traded currency pair, yet it has barely moved in the last couple of months. What is even stranger is that the lack of movement is not down to a lack of drivers: Greece nearly faced an exit from the Eurozone not that long ago and the prospect of a Fed rate hike next month is a key theme for markets right now. These factors should have made this pair particularly sparky over the summer months, but instead volatility has dropped and EURUSD has taken over the mantle as the wallflower of the FX world.
To put the staid performance of EURUSD into some context, this pair has traded in a 1.08 – 1.11 range since June, with the bulk of trading around the 1.10 figure. EURUSD seems to be trapped between its 50 and 100-day smas, even though volatility has picked up elsewhere.
3 reasons why EURUSD is the wallflower of the G10 FX world:
1, Eurozone economic data:
Greece and its creditors buckled and eventually agreed on a bailout last month, added to this, the Eurozone has seen an improvement in its economic data of late, Greece pulled out of recession in Q2 and the trade balance has been picking up, the trade surplus for June rose to EUR 21.9BN, which is a 2.8% rise on the month, with exports rising by an impressive 1.4%. This contrasts with the US, which saw its trade deficit widen in June by over 7% to a whopping $42.8bn. Traditionally, currencies with surpluses and strong economic fundamentals outperform those with deficits. This is not always the case, but it appears that weakness in the EUR over the last 18 months is starting to boost the Eurozone trade figures, which could have a stabilising impact on the currency in the coming months.
2, Volatility elsewhere
Volatility levels have been higher elsewhere, for example in the AUD, CAD and NZD vs. the USD, and in commodity prices. The Bloomberg commodity index plunged to its lowest level since 2002 earlier on Tuesday. This is where the action has been in financial markets in recent weeks; hence the slow-moving EUR has been a less attractive choice for traders, particularly short-term traders.
3, Fed uncertainty
We have mentioned before that economists and the market seem to be at odds on whether to expect a rate rise from the Fed next month with economists pricing in a near 90% chance of a hike and the market only pricing in a 50% chance (according to Fed Funds Futures). It appears that EURUSD traders may be following the Fed Funds Futures route, and being more cautious on the prospect of a US rate rise in the coming weeks. This could also be a key support for EURUSD right now.
Looking ahead, if the Fed does hike rates then we could see some weakness in EUR, however, we believe that there could be a greater chance of weakness in other, more fragile economies than the Eurozone right now, including the Aussie and the NZD, which are also battling headwinds from China. If the market’s intuition is correct and the Fed holds off from raising rates then we could see EURUSD break out to the upside above 1.1150, which opens the way to 1.14 and potentially to 1.15 in the medium-term.