High Level Fundamental View
Overall based on the economic data throughout the analysis I've identified a few key points. The fundamental data seems to be lining up in favour of a short side sell off with majority of the world now taking a huge hit during the 2nd wave of the pandemic. Global lockdowns have started once again but this time round with less of an economic stimulus. This could really help generate the risk off sentiment in the markets favouring a EURUSD short.
Macro Currency Strength Meter
You can see on the currency strength meter we have early signs of a potentially strengthening USD in the coming month and a weakening EUR. This cross over in the strength meter can be seen between the 10th and the 17th of October where the purple USD line peaks higher than the blue line. This overall gives us an early filtration of the markets which allows us to now hone in and focus on EURUSD.
Logikfx GDP Differential Indicator
The GDP differentials have also shown interesting signs with both the US and EU looking to recover at a fast pace in 2021. However due to this, the differential is only looking to expand by 0.5% which is fairly negligible overall and still sits within a negative differential which is in favour of a EURUSD short. That's why we've ticked this off as currently ready but we'll need to monitor this in the coming months to make sure of it.
Volkswagen Time Series Analysis
Throughout the analysis we've chosen VW as a point to analyse due to Europe's strong export markets for vehicles and VW being a global leading manufacturer for cars. The analysis has shown a -22% correlation in the past 10 years which suggests as VW prices go up EURUSD goes down. Currently we're seeing slight growth in VW which you can see in the orange line growing slightly since the recent dip in March. This may then equate to our EURUSD downside bias from our currency strength meter.
WTI Crude oil Analysis
Crude oil prices also known as WTI are another factor of analysis we've include due to oil being a big import in Europe and a big export in the United States. We've found that over the past 10 years there's been a whopping 88% positive correlation between WTI and EURUSD which means majority of the time as WTI moves down so does EURUSD. The recent oil prices have shown another dip which could trend further as global demands again are stunted by lockdowns.
Exxon Mobil Analysis
Similarly to why we've analysed WTI we've taken a big US oil producer to analyse against EURUSD. Overall in the past 10 years we've come across a 25% positive correlation which means in general as Exxon Mobil prices drop so does the EURUSD exchange rate. Again we have a similar scenario with Exxon prices dropping which should also see a EURUSD downside movement.
Interest Rate Differential Analysis
The interest rate differentials trend has been fairly eye opening with the differentials sitting on a negative number it's quite bearish on the EURUSD exchange rate. Throughout 2015 to 2019 we saw the differentials drop and throughout that period we saw huge dips in EURUSD. Recently it seems to have topped out with no interest rate changes so it's fairly neutral, however, any negative drops will be super bearish for the idea.
S&P500 (EUR) Stock Market Analysis
The stock market analysis again has shown another positive sign of a downwards movement with prices only just rebounded to pre-covid levels but still a few % lower which means over the past 7 months of stimulus stock markets are still yet to recover. Again this is another factor we can tick off as ready. The interesting thing about this relationship is that as the stock market over the 10 years has grown, EURUSD has fallen drastically and it looks like a potential downwards trend is about to happen again!
Commitment of Traders Sentiment Analysis
Euro hedge fund positions are still net long so we've got this on amber on our traffic light system. This is shown in the pink line above 0, it has been falling which is great so we've got a close eye on it to see next week if the trend continues.
The same analysis applies for USD positions with hedgefunds drastically closing their short positions and now open interest heading towards a positive number. This could be a huge shift in market liquidity and sentiment which may see the EURUSD trend we're looking for.
Price Trends and Analysis
Currently on the weekly levels we're seeing a very strong downtrend over the past 10 years. The trend lines seems to be holding strong but here we're really looking to identify any key signs of downtrends. Ideally we'll want negative price action in this region or in any region within the two green dotted lines as this is where majority sellers have come in the past.
At this point it's fine to use whatever technical analysis you think is viable to apply and use at your own discretion.
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