The champagne is on ice, the parity party awaits

Graphic of trading data chart
Matt Simpson financial analyst
By :  ,  Market Analyst

A burst of dollar strength pushed EUR/USD to just 5 pip above parity. Although the move appears to be on the back of rising yen, which is now the strongest major currency of the Asian session. The yen is stronger following comments from Kuroda, saying that inflation is likely to increase in pace. EUR/USD has been caught in the crossfire between dollar and yen strength - as EUR/JPY has fallen more than USD/JPY today it has taken EUR/USD down with it.

 

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A move down to parity has been floated on and off over the years, but now it is close to becoming a reality. But I’d be surprised if it simply gave way with its first test of 1.0000 in nearly 20 years. And I strongly suspect there’s a plethora of buy-limit orders around the parity level, with stops just below – and that makes a technical argument for an initial bounce. Of course, the risk here is that if prices do break below parity it could trigger some large stops and send the market lower. Whichever way it breaks, it will be a key focal point for traders in the European and US sessions.

 

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If EUR/USD breaks today it could prompt some volatility, trigger poorly placed stops and initiate fresh sell orders. There’s technical support levels around 0.9984, then the 0.9939 – 0.9950 zone. But overnight implied volatility rose to 18.89 annualised, which is roughly +/- 1.19% either side of parity. And demand four puts (downside protection) has also increased, so traders are seemingly bracing themselves for a rough ride today. Whichever way it breaks, it could make for a lively session.

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