Euro Near Major Top Against US Dollar, but Timing Anything but Clea

Though it has benefitted from the general uptrend in financial market risk sentiment, traders are likely to scrutinize Euro fundamentals as it approaches fresh highs against the US Dollar. The fact that net Non-Commercial Futures positioning is at its most net-long since the EURUSD traded at 1.60 shows sentiment is at clear extremes, and the probability of a major EURUSD top has increased considerably. A relatively quiet week of economic event risk gives us little in the way of foreseeable volatility, but Forex Options markets volatility expectations have nonetheless jumped considerably on recent US Dollar tumbles.

Traders will keep an eye out for German IFO business confidence data and Industrial New Orders report, but the center of attention will likely remain the US S&P 500 and broader risky assets. The rolling 50-day correlation between the EURUSD and S&P currently trades just short of record highs—emphasizing exchange rate sensitivity to broader financial flows. Key indices have likewise set fresh 2009 highs and remain ripe for corrections. If we were the betting types (and we are), we would wager that the Euro trades near a major top versus its US counterpart. To borrow a popular trading cliché, however, markets can remain irrational for far longer than you can remain solvent. Of course in this case we might say “Sentiment can remain extreme for far longer than you can maintain proper available margin.” The timing of a key EURUSD top remains anything but clear, and the week ahead will likely produce sharp price moves across major forex pairs. - DR