What Can USDCHF Tell Us About the EURUSD Breakdown?

The market has been enamored with this week’s price action in EURUSD, which unexpectedly peeked down to a new 2014 low under the key 1.3475-1.3500 support zone on Tuesday. However, as we roll into today’s North American session, the pair is fighting its way back toward 1.3500 on the back of decent PMI readings from the Eurozone.

For the currency union as a whole, the Manufacturing PMI figure rose to 51.9, in-line with expectations, but the Services report printed at 54.4, far better than the 52.7 reading economists were expecting. In what’s been a common theme throughout this year, Germany outperformed the Eurozone as a whole, while France underperformed markedly. Despite continued underperformance in the region’s second-largest economy, overall economic activity appears to be humming along, shrugging off the geopolitical uncertainty with the ongoing conflict in Ukraine.

Of course for traders, the most important question is whether the EURUSD will head higher or lower from here.

As we noted yesterday, when a currency pair makes a surprising move with no obvious catalyst, it can mean one of two things: that the move is a temporary mispricing that will quickly reverse, or that traders are anticipating new developments before the headline writers. At this point it’s still unclear which of these scenarios will play out in EURUSD, so it is worthwhile to see what the inversely-correlated USDCHF is doing.

Because of the Swiss National Bank’s decision to keep the EURCHF above 1.20, the EURUSD and USDCHF have shown a tight inverse correlation for years. Generally, a breakout in one currency pair is seen as more reliable if confirmed by a corresponding breakdown in the other pair.

Looking to the USDCHF chart below, rates have not yet broken above previous resistance at .9035, suggesting that traders should treat the EURUSD breakdown with skepticism for now. On a technical basis, the USDCHF just carved out a Doji* candle on the daily chart, showing indecision at the key resistance level. With the RSI near overbought territory, a near-term pullback in USDCHF cannot be ruled out. That said, the MACD is still trending higher above its signal line and the “0” level, suggesting that any pullbacks may be limited in scope.

From here, the key pivot will be .9035: if USDCHF manages to clear this barrier, it could quickly rally toward .9100, driving EURUSD lower in the process. On the other hand, the longer the pair struggles to clear this hurdle, the more likely a pullback (and corresponding EURUSD bounce) becomes. As long as USDCHF stays above its 100-day MA near .8900, the longer-term bias will remain to the topside.

• A Doji candle is formed when rates trade higher and lower within a given timeframe, but close in the middle of the range, near the open. Dojis suggest indecision in the market.