In the latter half of 2008, the EUR/USD and major equity indices experienced a tight correlation: Where the S&P 500 went, the EUR/USD went. The reason being lower equity markets heightened global risk aversion, and as a result, the US dollar was the direct beneficiary. So, lower equity markets produced a lower EUR/USD.
As the chart below illustrates, EUR/USD’s vicious run up to 1.4718 in late 2008 relative to the S&P 500 caused quite a disconnect in this well-established intermarket relationship. But now, in early 2009, equity indices moving towards 2008 lows have reignited global risk aversion, resulting in dollar buying interest. Hence, the EUR/USD:S&P correlation appears to be back on track.
As mentioned above, the S&P 500 is sitting on a key support line, which if broken, strongly suggests a return, and possibly a move through, the 2008 lows. Watch 810 trend line support in the S&P 500.
EUR/USD is facing a similar level of support at 1.2730. A break here also points to a likely test of the October 2008 lows of 1.2330.
With January’s NFP report due out Friday morning, keep a close eye on these levels. Should the number be much worse than expectation, it’s quite possible that these levels could be tested simultaneously, which would result in an explosive trading opportunity.
By Todd Gordon of FOREX.com
