pair to range trade

EURUSD Range Set Within a Much Larger Trend Channel

Range setups are extraordinarily difficult to find give current market conditions; and it is very important not to try and force trades that do not fit the market. With a predominately trend-based pace and the risk appetite wavering, the potential for breakouts into much larger moves is very high. Under these circumstances, it is best to shorten your time frame and follow the larger trend.

How stable is the EURUSD Range? •    Levels to Watch: -Range Top:       1.4965 (Range High, Pivot) -Range Bottom: 1.4840 (Range Low, Pivot) •    Considering the light fare on the economic docket over the coming week, EURUSD would seem a stable currency pair. However, the fundamental interests for this pair (and indeed all dollar-based majors) runs much deeper than the data scheduled for release. Far more compelling is direction and conviction of investor confidence. We are pushing extremes of confidence on a dubious foundation of fundamentals. This contrast cannot last.    •    The technical setup for EURUSD provides the same false sense of security that the fundamental background offers. A relatively consistent range has developed over the past four active sessions between 1.4965 and 1.4840. However, this congestion is abnormally tight and comes at the extreme of a very aggressive trend.  Suggested Strategy •  Long: An aggressive entry of 1.4850 is essential considering the narrow breadth of the range. •  Stop: An initial stop of 1.4800 will not cover a false tail carved near the range floor. To secure profit, move the stop on the second lot to breakeven when the first target hits. •  Target: The first objective is one-and-a-half times risk (75) at 1.4925. The second is 1.5075.

Trading Tip – Range setups are extraordinarily difficult to find give current market conditions; and it is very important not to try and force trades that do not fit the market. With a predominately trend-based pace and the risk appetite wavering, the potential for breakouts into much larger moves is very high. Under these circumstances, it is best to shorten your time frame and follow the larger trend. That is what we have done with the suggested EURUSD strategy; yet this position still holds considerable risk. Congestion for this pair has only developed just over the past week in a range set above a notable pivot around 1.4850 and below a series of highs that have set an impromptu boundary to new 14-month highs. A breakout from this zone within the week is almost certain; so setup is integral. As per the strategy we have drawn out, we are following the larger bullish trend with a bullish outlook and setting our entry very close to support. Over the last three active sessions, the market has tested its floor and then quickly bounced. These are the same conditions we want to see for entry. Should the market steadily depreciate towards the bottom of the range and then receive a jolt of volatility, a false break can easily trigger our stop before reversing. The first objective is one-and-a-half times risk; but it is well within the average daily range. A second target placed above resistance follows that a breakout will develop soon and the better probability is for an upside push. We will cancel all open orders after the volatility cools after Tuesday’s New York morning session.

Event Risk for Europe and the US

European – The euro has had little control over its own fundamental direction these past few months. Ever since the economic outlook was tempered by the dour readings from a number of notable Euro Zone members and ECB officials doused speculation of near-term rate hikes with remarks that were specifically tailored for a wait-and-see approach, the bullish drive from the euro has diminished. However, the currency hasn’t necessarily lost its buoyancy. As the primary counterpart to the US dollar, the euro has reaped the benefit of being the anti-dollar through the steady rise in risk appetite and talk of shifting reserves away from the established safe-haven. The indirect influence of risk appetite and the dollar’s struggle will be the primary catalyst for the second most liquid currency in the world next week. However there is notable event risk to take note of next week as well. All of the major market movers over the period are due within a few hours of each other. The PMI figures are used as a leading gauge for economic activity (an interesting trait with 3Q GDP due in a few weeks). The German IFO business sentiment report and regional industrial new orders will likely have limited impact.

US – Though the US economic docket is very light; the dollar will not lack for fundamental drive over the coming week. The well-established, bullish drive in underlying sentiment is impossible to miss; and just as obvious is the currency’s direct tie to the fate of investor optimism. The 3Q earnings season is the most promising source of volatility for the period. Last week’s earnings were generally beating forecasts; but it seems the market is far more skeptical of future returns this time around.

Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to jkicklighter@dailyfx.com.

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