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At the point of writing, German 10Yrs Bond stood at 1.381 while Italy and Spain both Averaged at 6.459 to derive a difference between the German yield of 5.078. Shown in the scattered diagram is a diagonal line drawn that tries to fit itself best between the fear indicator and the EUR/USD closing rate. Call the line the best friend of both Fear Indicator and EUR/USD. This line (their best friend) showed us the general relationship between the 2 variables, which is a inverse relationship. This line also has a simple linear equation that tries to summaries the relationship between the Fear Indicator and the EUR/USD.
Y being the EUR/USD and x being the value of fear indicator. Seems like we can find out EUR/USD rate using the value of fear indicator right? Not so simple! This is just a simplified equation that explains the relationship and should only be used as a guidance. In fact you see a R squared= 0.5363? It means that only 53.63 of changes in EUR/USD is explained by the fear indicator!
Based at the point of writing, the fear indicator is 5.078 so the equation suggests that EUR/USD should be somewhere near…? 1.2558 (about there) which is not true as price already went down to 1.2370. Then does it suggest price will go up to that level? No one knows, what we know is EUR/USD is below is 30 Moving Average and certainly pointing it Midterm trend down. If we give it a little faith, we can expect EUR/USD to head up again and that’s where shorting opportunities come in to join our mid term trend. In the very few days, EUR/USD may just move up abit.