Euro/US Dollar and the US S&P 500

Euro/US Dollar Loses Correlation to S&P 500 - Time for Turn Lower

he Euro/US Dollar recently lost its correlation to the S&P 500, but an early-week decline in both the currency pair and equity index suggests that we are at a turning point for risk sentiment.
In our most recent US Dollar Weekly Forecast, we discuss reasons why the breakdown in the S&P/EURUSD correlation may herald a shift in the tide. Indeed, it seems as though financial markets reached an unsustainable ‘winning streak’ on the S&P’s sixth-consecutive weekly advance.

Euro/US Dollar and the US S&P 500 Index













The Euro/US Dollar temporarily lost its correlation to the S&P 500—leading many market analysts to claim that forex market dynamics had shifted. The US Dollar had previously moved almost tick-for-tick with the S&P and other key risk barometers, serving its traditional role as a safe-haven currency. The more recent disconnect suggested that it may have lost its allure as a store of value, but we would argue that paradigms are unlikely to shift so quickly. Instead, we view the breakdown in correlation as a contrarian sign of a market top.



As the S&P 500 hit impressive multi-month highs, the US Dollar and Japanese Yen generally drifted lower. Given broader currency and financial market trends, however, we believe it is only a matter of time before we see a breakdown in risk and sharp rallies in the USD and JPY. Indeed, early-week trade has already seen the EUR/USD break significant lows, and our fundamental and technical forecasts remain bearish.