The Joys of Being in a Range-Bound Market

For several months, one of the hottest debates in the currency world has been “1.50 or 1.60?” Those who follow the Euro-US Dollar currency pair have been debating its future for several months. Since around the end of February, the price has been locked within a range of 1.50 and 1.60. Only on three days has the price ventured outside that area during the past few months, yet each of those days, the price closed back within the range. In other words, despite minor breaks, the tight range between 1.50 and 1.60 is still in play, signaling more uncertainty and likely more range-bound movements in the coming months.

Given that the EURUSD is the most liquid global financial instrument, the importance of the pair is unparalleled in the currency world (and it’s not even close). The EURUSD is involved in 27% of the trades in the FX market.¹ The next most commonly traded pair, the USDJPY, is involved less than half as frequently. Movements in the EURUSD ripple throughout the entire market, and looking back over several years, it is clear that many other currency pairs have mimicked the trends of this predominant instrument.

As there is presently a firmly established range, trading has become more tedious for many. Some traders thrive in range-bound markets, yet most do not. Many of the more well-known traders are not range-traders, but carry-traders. They thrive on trends and rollover, and while the rollover is still present in a range-bound market, the trends go out the window. The strategy of simply buying a currency and letting it sit for some time becomes more dangerous, as it is unclear which direction the price will move after breaking out of the range. While the trend for much of the decade in the EURUSD has been upwards, many analysts believe that the current range will eventually lead to an end of that overall trend. While I personally feel the opposite, the important point here is that range trade has certainly thrown a wrench into the trend. As a result of being in such a tight range, it has become much more difficult to predict future movements for the EURUSD.

The next few months promise intrigue for the pair. Now that each central bank, the US Federal Reserve and the European Central Bank, seem to be done moving rates for the time being, the pair should be allowed to fluctuate without fundamental interruptions. We will be able to see if the USD is ready to make a resurgence, or if this range is merely a bump in the road for the rise of the EUR.

Upcoming Figures
EUR Euro-Zone Trade Balance (May)
CAD Leading Indicators (Jun)

¹ I based my statistics off of the Bank for International Settlements’ “Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity in 2007”.

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