Trading The EURUSD / Crude Oil Relationship

07/29/2008 12:00 am EST

Focus: FOREX

Todd Gordon

Founder, TradingAnalysis.com

The world’s oil supply is traded in US Dollars.  And the USD (shown in blue against Euro) has been declining since the turn of the century. As the value of the USD falls, the price of the world’s oil supply should rise reflecting the greater number of dollars required to purchase a single barrel of oil.  The degree of correlation, or causation, of the two markets has varied over the years, but this morning’s huge moves show the dollar and oil trading in lockstep. Not only are they trading in lockstep but they are testing significant support levels that define their eight year ascent.

Crude Oil futures are testing uptrend support (shown in blue) originating from September 2007.  Below $121.60/bbl on a daily closing basis (currently trading  $121.65 at 11:15 AM EST), and oil should quickly fall back towards the $100/bbl level.  However, should the oil bulls successfully defend $121.60/bbl, a return to $140.00/bbl is very possible. 

EURUSD is testing a similar and equally significant uptrend support (shown in blue) originating from September 2007.  Below 1.5600 (currently testing 1.5615), and the USD should rapidly strengthen three cents relative to the Euro to a value of 1.5300.  However, should 1.5600 win the day, this significant test of support should yield a return to the 1.6000 level.

By Todd Gordon

www.Forex.com

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