There is a sense of security when trading the world’s most liquid currency pair. However, market depth and the stability it provides are only beneficial with the broader market is itself on a steady course. Considering the swings over the past few weeks, it is clear that EURUSD is just as risky as many of its less actively traded counterparts. Therefore, our strategy must once again take the cautious approach.
| Why Would CADJPY Hold a Range?
· Levels to Watch: -Range Top: 1.3335 (Trend, Fib, SMA) -Range Bottom: 1.2885 (Pivot, Fib)
· The world’s most liquid currency pair is the lightening rod for investment trends and growth forecasts; but it also has its own inextricable connection to risk appetite. Over the past few weeks, traders sentiment was one of the primary drivers of price action; and it is likely to retain that status heading into next week thanks to the dollar. However, fundamentals are far more invasive than risk alone. NFPs and the ECB decision loom.
· Congestion has been the name of the game for EURUSD over the past few months. However, this has not been a clear range. Sharp increases in volatility, false breakouts and temporary ranges have plagued this pair. One consistency has been found in the dominant falling trend from last summer which now has technical confluence around 1.3325.
Suggested Strategy
· Short: Half-sized entry orders will be placed at 1.3315, requiring a bounce before turning lower. · Stop: An initial stop of 1.3445 offers enough of a buffer above trend to signal a true breakout. To secure profit, move the stop on the second lot to breakeven when the first target hits. · Target: The first objective equals risk (130) at 1.3185 while the second target is set to 1.3055. |
Trading Tip – There is a sense of security when trading the world’s most liquid currency pair. However, market depth and the stability it provides are only beneficial with the broader market is itself on a steady course. Considering the swings over the past few weeks, it is clear that EURUSD is just as risky as many of its less actively traded counterparts. Therefore, our strategy must once again take the cautious approach. Positioning should be half the normal size for risk takers and less for those that are averse to the heavy round of data due next week. With notional risk lowered, we can set stops wider to follow the bigger technical setup. Should the long-term falling trendline break, the probability of a major reversal is far greater and therefore too dangerous for range conditions. Considering spot’s close just below the major technical pattern, we are left to find a reversal almost immediately at the start of next week. Otherwise, the pressure for a breakout will increase dramatically as the economic docket heats up. We will cancel any open orders before the ECB’s rate decision on Thursday. In the meantime, should the market test either 1.3400 or 1.3175 before we are entered; we will cancel any open orders. Typically, the week’s open is slow; so we can potentially monitor price action before placing the orders.
Event Risk for Euro Zone and US
Euro Zone – The larger fundamental trends behind the euro have faded over the past few weeks. A steady clip of recession has been fully priced in thanks to policy officials’ warnings while the burgeoning financial crisis in the Eastern countries has settled thanks to a rebound in global credit market liquidity. However, one prominent theme is being pushed to the forefront. At 1.25 percent, the regional economy’s benchmark lending rate is considered one of the strongest. However, it isn’t the overall level that is so important but rather the outlook for where the target rate will bottom and how quickly it can rebound when the growth begins to recovery. It has been the case for years that market participants expect the ECB’s rate to hold up comparatively well; but this has not been the case recently. Just this past week, bank president Jean-Claude Trichet released a gag order on central bank governing members due to growing decision on how far rates should be cut and the use of quantitative easing. Other indicators will be considered secondary.
US – Looming event risk for the US over the coming week isn’t as incendiary as it was this past period; but the fundamentals scheduled for release can nonetheless supply significant volatility - and a few could even catalyze a dominant trend in their own right. The most notable report with a hard release time attached to it is Friday’s NFP release. In the past few months, this indicator has lost some of its drive as traders have attempted to price in the severely week numbers in advance. However, with a greater focus on the pace of recession (and timing for recovery), there will no doubt be a sharp reaction to any surprises. The other event that could single-handedly alter the dollar’s future is the Fed’s Stress Test. This could potential trigger another seizure in credit and capital markets.
Data for May 4 – May 11 Data for May 4 – May 11 Date (GMT) European Economic Data Date (GMT) US Economic Data May 4 German Retail Sales (MAR) May 5 ISM Non-Mfg Composite (APR) May 4 Sentix Investor Confidence (MAY) May 7 Consumer Credit (MAR) May 7 ECB Rate Decision May 8 Change In Nonfarm Payrolls (APR) May 8 German Industrial Production (MAR) May ? Fed Stress Test Results
Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John at jkicklighter@dailyfx.com.
