Despite rising Greek default risk that sent European indexes like the DAX plunging, the EURUSD is showing strength. Here’s why, to play it, and the longer term potential dangers for the EUR and Euro-zon.

• EURUSD rising despite apparent lack of supporting economic fundamentals or news, and rising Greece anxiety
• How rising Greece default concerns ironically support EURUSD
• How the short term boost to the EURUSD from rising EU bond yields could become a longer term threat
• Simple short term beginner EURUSD trade ideas

Yesterday the EURUSD made its 5^th straight test of the strong resistance at the 100 day EMA around 1.118. Although it failed to close above it, today it has broken above yet again, and is holding on as the Asian session winds down. The driver of this persistent strength is significant, so we’ll follow up yesterday’s EURUSD analysis with this one.

Fundamental Drivers: EURUSD Benefiting From Greek Anxiety Effects On EU Bonds, US Trade Deficit

This EURUSD strength seems odd at first glance given the rising anxiety about Greece, which drove both Greek and most other EU stock indexes sharply lower yesterday, with the STOXX 50 down 1.24% and both the DAX and Madrid indexes down over 2.5%.

Ironically, (and counter-intuitively) it’s this very fear that’s supporting the EURUSD, because it’s driving EU bond prices higher and yields lower to reflect the rising risk. For example Tuesday’s bond markets showed that while 10 year US Treasury note yields were up 2bp, European bond yields rose even more. Italian and Spanish yields of the same maturity jumped 27bp, French yields 9bp, and German bund yields 6bp.

The pair typically follows the spread between US and EU bond yields, and is clearly doing so now, particularly because yesterday’s economic events did not offer any explanation for EUR strength.

EU Bond Weakness: A Short Term Strength, A Longer Term Weakness For the EUR, EURUSD

Although this EU bond weakness is a short term positive for the EURUSD, it could become a negative force, and a big one, if it persists. Here’s why. Long term EU bond price weakness would mean that the ECB’s bond buying program (aka: QE-EU) isn’t big enough to drive EU bond prices down, and thus needs to be expanded. That means expanding the supply of Euros even more, and further undermining the EUR over the long term.

That said, the worse than expected US trade deficit didn’t help the USD, because this report suggests that the US economy contracted in Q1. That raises the chances of a US rate cut coming later rather than earlier, though most still believe we’ll see one in 2015. However that consensus September date is looking less likely.

EU Bond Weakness Also A Longer Term Political Threat

Expanding QE-EU would pressure more than just the Euro. It would also raise political tensions with the ‘hard money’ EU members like Germany, Holland, and Finland, whose tolerance for further risks of a debased EUR isn’t limitless.

Simple Short Term Trade Strategies: Continue To Play The Flat Trading Ranges

For the next 24-48 hours our range trading strategy discussed in Wednesday’s article remains in effect. See here for details. In sum, there are two general options:

• Those planning to hold for multiple days should stick with yesterday’s recommended trading range, highlighted in red horizontal lines in the chart below).
• Today we would add that those willing to trade narrower ranges for shorter holding periods could consider trading bounces between the narrower trading range of the past week, 1.11 – 1.128, highlighted in yellow lines in the chart below.

EURUSD DAILY CHART KEY:10 PERIOD CANDLE EMA DARK BLUE, 20 PERIOD CANDLE EMA YELLOW, 50 PERIOD CANDLE EMA RED, 100 PERIOD CANDLE EMA LIGHT BLUE, 200 PERIOD CANDLE EMA VIOLET, DOUBLE BOLLINGER BANDS NORMAL 2 STANDARD DEVIATIONS GREEN, 1 STANDARD DEVIATION ORANGE.

Note the momentum: Rising momentum puts the odds in favor of the pair testing to the upside of the range, given the following indicators of upward momentum:

• The rising 10, 20, and 50 day EMAs on the daily chart above (see chart key to identify each one)
• The pair is in the upper quarter of the double Bollinger bands (bounded by the upmost green and orange lines) of both the 1 and four hour charts below.

EURUSD 1 AND 4 HOUR CHARTS. KEY:10 PERIOD CANDLE EMA DARK BLUE, 20 PERIOD CANDLE EMA YELLOW, 50 PERIOD CANDLE EMA RED, 100 PERIOD CANDLE EMA LIGHT BLUE, 200 PERIOD CANDLE EMA VIOLET, DOUBLE BOLLINGER BANDS NORMAL 2 STANDARD DEVIATIONS GREEN, 1 STANDARD DEVIATION ORANGE.