It has been about a month since the news emerged that a highly contagious virus that has claimed lives had made its way from China to the West. To limit any damaging economic consequences, various measures have been taken to instil a sense of confidence that an adequate solution will be found.
For the European Union and its faith in the euro, this presents a major challenge. This year alone, the euro’s value has fallen by 3.7% compared to the US dollar, over a period of just 35 trading days. A comparable price/time ratio occurred halfway through November 2018. This was followed by a temporary recovery, which ended in January 2019 after the falling 120-day average was briefly exceeded. In effect, this average reflects the evolving insight into the foreign exchange market in relation to events and consensus expectations.
The recent acceleration in the downward trend for EUR/USD has pushed the currency pair towards a support line that could deliver a temporary recovery at around $1.0750. One technical argument for this is the rising difference between the actual value of EUR/USD and the derived 120-day average, which currently stands at around $1.1050. A reversion to this average is commonly seen as a “mean reversion” trend. The difference between the actual foreign exchange rate at around $1.08 and $1.1050 is 2.25%. On 30 September 2019, this difference stood at 2.41%; a figure that has only been exceeded for two consecutive days in November 2018. These two troughs connect the technical support line with the EUR/USD trough in November 2017.
Based on daily high/low listings, a low that fell below the low recorded on the previous trading day was recorded for the eleventh (!) trading day in a row on 18 February of this year. This series of eleven lower intraday listings in EUR/USD has only occurred on one other occasion this century: on 13 and 16 March 2015.
That development laid the foundation for higher EUR/USD values.
EUR/USD since 2014 + 120-day average + (%) variation vs. 120-day average histogram
The EUR/GBP currency pair has fallen out of a “continuation” triangle. The downward trend in EUR/USD continues.
The EUR/JPY currency pair has concluded a recovery within its multi-year declining trend and is falling once again.
EUR/JPY since 2018
Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the forex world. This column reflects his personal opinion and is not intended as professional investment advice.