Using Gold For Clues In Euro

• faithmight
• August 29th, 2010

Correlations with gold is not a new concept for $DX_F traders. And if you are trading any currency versus the US dollar, you have paid attention to or looked at $GLD to get a clue on moves in the USD. But I recently learned how price action in gold ($GLD) can be used to identify currency leaders and laggards across the forex market rather than just the USD. @alaidi tweeted this video that included some great charts of Gold/EUR AND Gold/USD. After watching I thought about the recent price action in the $EURGBP.

As a reserve currency and because gold is denominated in US dollars, the USD and $GLD were highly negatively correlated. Hence, a move up in one asset saw a near simultaneous move down in the other. However, since the European sovereign debt crisis became a global concern, the EUR has become more highly negatively correlated than even the USD. This change in correlation away from the USD to the EUR signals that the EUR is actually a weaker currency than the USD.

Assessing that EUR is a currency laggard right now, traders can take advantage of its performance versus $GLD for clues in direction for the $EURGBP. After being rangebound between 0.8250 – 0.8170, the market respect gold’s rally versus the euro and breaks the range to the downside for the first time since late June. A sustained break below 0.8170 opens the way to 0.8100 and then ultimate MT support at 0.8062. If the break below the channel bottom does not hold, the first area resistance will be 0.82 and then the 100SMA on the hourly chart at 0.8220 and then the range top around 0.0.8250/70.

Since breaking the bottom of the range, price got bid and rallied to the 61.8% Fibonacci level at 0.8227 where price topped out twice and moved back lower. However, we have higher lows and lower highs indicating that this pair is consolidating once again. Last week Gold/EUR broke above the 50% Fibonacci €960 level signalling more weakness in the EUR. Even if price breaks above the previous highs at 0.8230, price has to break above the range top at 0.8270 to change the bias on the pair to bullish. For now, as gold continues its rally versus EUR, EUR will continue to weaken.

How is EUR trading in your favorite euro currency pairs?

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

Tickers: $EUR, $GLD, $USD, correlation, EURGBP, gold

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