Euro-dollar moving averages suggest a strengthening of the single currency

Ashraf Laidi
ACCORDING to patterns of euro-dollar trend dynamics, the currency pair may be ripe for an upside breakout. For the third consecutive week, euro-dollar has pushed further above its 50-week moving average (WMA). Moving averages are used to define price direction by smoothing out price data with a slight lag. The longer the moving average, the longer the time lag.

The interesting point here is that, since 2002, each time euro-dollar broke above its 50-WMA, it went on to cross above its 100 and 200-WMA (100 and 200-WMAs are popular measures of medium and long-term trends). The pattern was successful in five out of six occasions.

Considering euro-dollar has broken above its 50-WMA, it may be set to break above its 100-WMA (currently $1.3430) and 200-WMA ($1.3530), which are at 3.50 per cent and 3.70 per cent above the current market price. A 3.5 per cent rebound in euro-dollar from current levels may sound modest, but a renewed break above the 200-WMA in the most liquid currency pair will likely flash the radar screens of macro hedge fund traders.

A mirror image of the aforementioned analysis is that of the US dollar index, which is a basket of six currencies (euro, yen, sterling, Canadian dollar, Swiss franc and Swedish krona). Since 57 per cent of the index is weighted towards the euro, it is almost perfectly inversely correlated with euro-dollar. And just as euro-dollar has a positive track record in breaking above its 50-WMA, the index has consistently added to its losses each time it broke below its 50-WMA. So far, the index has broken below both its 50 and 100-WMAs: 78 on the US dollar index and $1.35 on euro-dollar may be just a matter of time.

Keep informed with the expert opinion of City Index’s chief global strategist, Ashraf Laidi: