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Euro vs. Dollar: When Mood Trumps Reason
Sometimes, all forex markets need is an excuse.
On July 29, the U.S. dollar gained strongly against the euro, sending the EURUSD exchange rate down some 200 pips, or two full cents. But if you looked at the day's news for explanations, it probably left you scratching your head:
- "Home prices in 20 U.S. metropolitan areas fell at a faster pace in May, and consumer confidence stayed near the lowest level since 1992 this month, posing a threat to household spending." – July 29, Bloomberg.
- "Merrill [Lynch] expects to record a write-down of $5.7 billion for the third quarter. Such an outcome… would bring its charges since the credit crisis erupted last summer to more than $45 billion." July 29, The New York Times.
I'm no economist, but news like that is supposed to make you think the U.S. dollar will fall, right? Yet it rallied. Why? Apparently, because a tiny bump in the U.S. consumer confidence, from 51 to 51.9, reduced "concern the world's largest economy may fall into a recession." (Bloomberg)
To put that 0.9 increase in perspective, look at this chart of the U.S. consumer confidence index. (Source: The NYT) And don't worry if at first you don't notice that little wiggle of an uptick at the bottom of the chart: It IS hard to see it against the background of that 50-percent-plus crash in consumer confidence in less than a year. Good thing there were enough forex traders on July 29 who took that wiggle to mean the U.S. economy may avert recession, after all.
If the above explanation doesn't sound convincing to you, I agree: Forex traders were simply looking for an excuse to sell the euro on July 29. They felt bearish, and they needed something, anything, to justify their mood. Like we've said on these pages before, when traders feel bullish, they will buy, and when they feel bearish, they will sell – regardless of the news. This is just another example of how collective psychology can trump reason.
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Here's what is also interesting. On the evening of July 29, Elliott wave patterns in the EURUSD charts were saying, "Nope, didn't convince me, either" – indicating that a bottom was near. That prompted EWI's Currency Specialty Service analysts to post this forecast that evening:
Update For: Wednesday
Posted On: Tue, 29 Jul 2008 19:06:24 GMT
EURUSD Last Price: 1.5584 [Bottoming] The dive below 1.5629 makes the decline from 1.6036 a five-wave movement. With five waves down, at least a rally attempt is due…whether you are bullish or bearish EUR$, a rally is due next.
Following that forecast, on Wednesday (July 30) the EURUSD briefly dipped lower and then staged a 180-pip rally that culminated at 8:30 AM on Thursday (July 31) after the release of the U.S. Initial Jobless Claims number.
Where is EURUSD going next? EWI's Currency Specialty Service has answers now. Details.