- EUR/USD reaches a three-week low at 1.2724.
- Market sentiment weighs on the EUR/USD as flows flew to the safe-haven USD.
- The US Dollar Index rises above 93.00 despite weak US consumer sentiment data.
EUR/USD keeps sliding for the second day in a row, exchanging hands at 1.1728 down 0.30% on the day at the time of writing. After a stellar US Retail Sales report on Thursday, the EUR/USD pair is trading at three-week lows, on broad US dollar strength.
The market mood is in risk-off mode, with US stock indices sliding between 0.26% and 1.19% and bond yields rising. The US 10-year benchmark rate is at 1.368%, up almost four basis points on Friday, underpinning the greenback. The US Dollar Index is up 0.33%, sitting at 93.17.
During the European session, the Eurozone Core Consumer Price Index (YoY) rose by 1.6%, in line with expectations. Meanwhile, the Core CPI for August (MoM) edged higher 0.3% as foreseen.
Across the pond, the US University of Michigan Consumer Sentiment increased slightly to 71 in September versus 70.3 in the previous month, although it was worse than the 72.2 expected. The report attributed the declines to higher prices, as consumers expect the inflation rate to rise 4.7%, matching the highest since 2008.
Investors’ focus turns to next week events. The Federal Open Market Committee will discuss monetary policy issues, being the QE reduction the spotlight of the statement.
The USD/JPY currency pair has traditionally had a close correlation with U.S. Treasuries. When interest rates head higher, Treasury bond prices go down, which lifts the U.S. dollar, strengthening USD/JPY prices.
A foreign exchange correlation is the connection between two currency pairs. There is a positive correlation when two pairs move in the same direction, a negative correlation when they move in opposite directions, and no correlation if the pairs move randomly with no detectable relationship.
You can trade on forex pair correlations by identifying which currency pairs have a positive or negative correlation to each other. In the conventional sense, you would open two of the same positions if the correlation was positive, or two opposing positions if the correlation was negative.
A good rule of thumb for traders new to the market is to focus on one or two currency pairs. Generally, traders will choose to trade the EUR/USD or USD/JPY because there is so much information and resources available about the underlying economies. Not surprisingly, these two pairs make up much of global daily volume.
The major currency pairs on the forex market are the EUR/USD, USD/JPY, GBP/USD, and USD/CHF. The four major currency pairs are some of the most actively traded pairs in the world, along with the so-called commodity currency pairs: USD/CAD, AUD/USD, and NZD/USD.
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The EUR/USD pair has become the most widely-traded pair in the world because it represents a combination of two of the biggest economies in the world.
It is affected by factors that influence the value of the euro and/or the U.S. dollar in relation to each other and to other currencies. For this reason, the interest rate differential between the European Central Bank (ECB) and the Federal Reserve (Fed) affects the value of these currencies when compared to each other.
For example, when the Fed intervenes in open market activities to make the U.S. dollar stronger, the value of the EUR/USD cross could decline due to a strengthening of the U.S. dollar compared to the euro. Along the same lines, bad news from the EU economy has an adverse effect on prices for the EUR/USD pair. News of the government debt crisis and immigrant influx in Italy and Greece resulted in a euro selloff, prompting the pair’s exchange rate to plunge.
In the Forex market, gold is a form of currency. The internationally accepted code for gold is XAU which is a symbol used under the ISO 4217 currency standard to denote one troy ounce of gold. It is known to be a “safe-haven” asset, expected to increase its value in times of volatility and economic uncertainty.