DAX Takes a Hit on Euro Strength, Broader Outlook Remains in Limbo
- Post-ECB euro rallies strongly, DAX drops over 1%
- Head-and-shoulders top still no closer to triggering despite decline
- Trading outlook muddled, risk/reward still favors sidelines
What big factors are expected to impact the DAX & Euro in Q3? Find out here!
The DAX didn’t like yesterday’s euro rally post-ECB. Not one bit. During the final three hours of the cash session the euro rallied sharply over 1% while the DAX fell over 1%. The one-month correlation between the currency and index hit an extreme of -92% (practically trading 1-to-1 inversely) earlier in the month, but is starting to diminish as it sits at -46% today (still significant). At any rate, sudden sharp moves in either direction in the euro are likely to spark a DAX move. The relationship isn’t something we spend a lot of time focusing on, but worth keeping in mind when there is a possibility for the euro to make a big move on an anticipated event. Generally speaking, while the correlation is more often than not negative, the euro and DAX do at times trade together, so be careful in overanalyzing the relationship.
The question we asked a couple of days ago was this – “Will the developing H&S top become a reality?” (*H&S = Head-and-shoulders) It’s a question we can’t answer until the DAX trades below the neckline and into the April gap. It looks like a solid topping formation, but without a confirmed break the pattern is still in a development stage. If in the not-too-distant future the DAX doesn’t break down then an alternate path (bearish or bullish) may need to be considered.
In the shorter-term we are lacking clarity; low volatility is making sure of this. There are sellers above 12500 and support comes in near 12300. For now, risk reward generally favors the sidelines unless scalping, in which case there are still some intra-day moves nimble day-traders can take advantage of.
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---Written by Paul Robinson, Market Analyst
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