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It is a quiet morning in the foreign exchange markets with the dollar holding onto its gains.  As our colleague Boris Schlossberg mentioned this morning, the G7 meeting proved to be a dud for the foreign exchange markets as the leaders of the richest nations avoided official comments on currencies.  Although the finance ministers and central bankers attempted to reassure the markets that everything will be alright with Greece, investors want action and not words.  Therefore the euro is still struggling with debt worries that dominated this weekend's headlines in both financial and non-financial media. The front of the week should be very quiet for the dollar with retail sales not due for release until Thursday.

All eyes are on equities today with the market itching to see if Friday's aggressive rebound in U.S. equities will last. Based upon the initial sell-off in stocks at the open, investors are not necessarily convinced that smaller job losses will be enough to keep the recovery going.  After such a deep sell-off last week and the lack of market moving data in the beginning of this week, we expect volatility in currencies and equities to compress which could help carry trades recover.

In the meantime, currency traders should continue to keep their eyes on equities.  Over the past year, there has been an 88 percent positive correlation between EUR/USD and S&P 500.  This correlation has increased to 92 percent since the beginning of the year which suggests that if there is no catalyst to move currencies, forex traders will most likely to take their cues from equities.  The following chart illustrates the strong correlation between the EUR/USD and S&P 500 over the past few years - there is no reason why the relationship will change this week. Source: Bloomberg

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.