Fact: Euro to Dollar Only Rises in New York Trading, Falls in London Trading

euro exchange rate 3

DNB Markets have put together some interesting snippets on how currency pairs move according to which time zone they are in.

  1. Euro to dollar rate @ 1.1207
  2. Dollar to euro rate @ 0.8922

Tokyo, London and New York - the movement of a currency can depend on which centre is trading it suggests new research.

Research from DNB Markets, the Danish investment bank, shows that the euro to dollar exchange rate has only risen during American trading hours in 2016, in particular in March and April 2016.

euro vs dollar in different trading zones

A divergence in trading pattern London vs US since spring 2015 has been noted, broadly in line with when the ECB started its expansive policy.

This suggests that European are selling euros - a theory encapsulated by Deutsche Bank in their Euroglut theory.

The “Euroglut” hypothesis assumes a surge in European capital outflows to the rest of the world as investors are forced to seek yield elsewhere, despite the region’s large current account.

Since 2011 EURUSD has risen 54% of all trading days in the US session, the extent of the move has been particularly large in 2016 confirming a new-found preference by Europeans to sell their assets.

Euro Stumbles on US Fed Minutes Release

The euro to dollar exchange rate slumped in decisive fashion below the  1.13 support handle following the release of the US Federal Reserve's minutes to their April meeting

The USD surged after the minutes revealed that, "most Fed officials saw a June hike likely if economy warranted."

Treasury yields soared and in a matter of hours Fed fund futures went from pricing in a 4% chance of tightening in June to more than 30%. 

"Such strong and consistent movements generally have continuation and we would not be surprised to see further dollar gains over the next 24 to 48 hours," says Kathy Lien at BK Asset Management.

The dollar had been well bid already following the release of strong retail sales results for April last Friday, was followed by relatively strong inflation and housing data on Monday May 18, which diffused concerns about an economic slowdown in Q1 infecting Q2. 

The Outlook: Is This Fall Now Too Deep?

A number of commentators have suggested that the euro exchange rate's sell off may be a case of too far, too fast.

"It is rare for Fed minutes to trigger such a big move in the U.S. dollar but when the market feels one way and the Fed signals another, these surprises can cause exaggerated movements in currencies," notes Kathy Lien at BK Asset Management.

Robin Wilkin at Lloyds Bank agrees, "FX has a tendency to over-shoot in such an environment and so while bond markets are arguably more correctly priced now."

However, Wilkin does not believe this will halt the decline in EUR/USD:

"We still see room for the EURUSD to push towards trend line support in the 1.1090 region. We are expecting that area to hold for another correction phase."

Only a move through the 1.1290/1.1330 intra-day resistance area would see the Lloyds analyst shift into a neutral, range trading state of play.

"Longer-term we are correcting the downtrend from 1.60 and 1.40, having developed a base at 1.0450. It is not clear whether it will remain in a range, or see a C wave rally up to test monthly resistance in the 1.19-1.23 region," says Wilkin.

The Outlook Deteriorates

Our own technical studies of EUR/USD provide little comfort to traders as the exchange rate remains stuck back in its more than year-long sideways range between 1.05 and 1.15 (broadly despite a few exceptions).

And within this trendless sideways range trying to pick the winning side of smaller moves remains a game of chance.

On the daily chart the pair looks more bearish than on the weekly chart where it remains in a longer-term up-trend.

The weeklies provide a clear trend-line for the up-trend from the November 2015 lows, which is currently situated at 1.1220.

EURUSDMay18

There is, however, also a ‘mini’ down-trend now from the 1.1770 spike highs, which continues to push lower, and has just recently broken below the 50-day moving average.

That this may have lower to go depends on your interpretation.

Swissquote’s technical analyst Yann Quenlann, for example, takes a bearish view, noting that “Bearish momentum is increasing,” in the pair, and more importantly that it has broken out of a broadening formation after moving below 1.1272, which has serious bearish consequences.

EURUSDMay18Swiss

Commerzbank’s technical analyst Karen Jones also notes a key breakdown in the last 24 hours:

“EUR/USD eroded its 2-month uptrend and 20-day ma at 1.1388/72 on Friday and is expected to remain on the defensive this week.We look for losses to the 1.1216 April trough.”

Currently she sees price action being supported by the 55-day moving average, which is likely to provide an obstacle to further downside.

From our perspective it is the major trend-line for the move from the November 2015 lows which is the key to the next phase of market activity, and this lies at 1.1220. A clear break below that - defined perhaps as move below the 1.1180 mark would go a long way to changing the medium-term outlook to a more bearish one, with a tentative initial target at 1.1125.

OtheR Notable FX Moves

We have continued to see USD CAD moving higher as oil prices soften and rate spreads move further in favour of  the US over Canada, risking further investor catch-up. Expect evidence of further US/ CAD Q2 macro-economic divergence as today is set to see another disappointing domestic data release.

CIBC Capital Markets Economics expect wholesale trade to decline by 0.7% in March, compared to a median expectation of a 0.5% fall. Moreover, with retail sales tomorrow also likely to materially undershoot expectations, underlining a weak retail handover into Q2, expect USD CAD topside to remain in play, this comes as the break of 1.3015 opens the way for 1.3130 and above there 1.3170 and 1.32.

Only a close back below 1.3015 would risk compromising maintaining topside targets into the mass of data ahead of the long holiday weekend.