EUR/USD Down by Over 1.5% in New York Session
Tuesday 5th July 2022 saw the Euro and several other major currencies fall unusually strongly against the US Dollar during the London session, continuing into the early part of the New York session. The benchmark EUR/USD currency pair was down by more than 1.50% as the NYSE opened for the first time after the 4 July holiday the previous day. The GBP/USD currency pair was also down by more than 1.3%, trading well below $1.1950. The Canadian, Australian, and New Zealand Dollars were not far behind the Euro and Pound in terms of declines against the greenback, but the Euro led the way.
As the NYSE opened, the EUR/USD currency pair was trading at $1.0259, just a few pips above the huge quarter-number at $1.0250. This is the lowest price seen since late 2002 – a 19-year low. In recent days we have seen a similar, 20-year high in the USD/JPY currency pair, so although there is a story in the Euro’s weakness, the longer-term story has been Dollar strength dominating the Forex market.
What Triggered the Move?
Although the day’s price movements in both EUR/USD and GBP/USD are unusually large, there has been no clear trigger for the decline, possibly excepting some downbeat comments from the governor of the Bank of England who stated that “the global (economic) outlook has deteriorated markedly”. However, this was said after the strong movement had begun. Earlier in the day there was a release of disappointing French industrial production data, but it was nowhere near underwhelming enough to justify such a reaction.
This strong advance by the US Dollar probably has its most immediate cause as yesterday’s US holiday – when a major market of an asset is closed, it often makes an unusually large movement in the subsequent session, and this seems to be what is happening here.
Another factor is that speculative assets are in decline almost everywhere, and institutional investors cashing out seem to be piling their cash into USD. Truly, 85% of the price movement is about the US Dollar, as is typically the case in the Forex market.
What Does This Mean for Traders?
The important thing to note about this strong directional movement in line with the long-term trend, is that the size of this move is well beyond normal volatility. When we see a currency pair such as the EUR/USD break to new long-term lows or highs on such big volatility, the move more often than not continues for at least one more day. This means that, provided there is no dramatic bullish retracement, and the New York close sees the price near the low of the day, the price will be likely to fall further over tomorrow, giving a potential short trading opportunity in the EUR/USD currency pair.
Today’s price movement in the EUR/USD was (at the time of writing) almost 200 pips. The 100-day average true range (ATR) is 100 pips. Over the past 20 years, there have been 24 days when the price broke to a new 50-day low on volatility greater than 2 X ATR 100, and 13 of those occasions saw the price fall further the following day – a win rate of 54.16%. However, keep in mind that it is important to use a stop loss of at most 1 X ATR 100, otherwise the overall historical edge disappears.
These market events also indicate that it can pay off to keep following this long US Dollar trend, which is maintaining its strength.