EUR/USD Range Should Hold Ahead Of ECB Decision

The EUR/USD has given back some of its earlier gains but remains positive for the day and on track to test the upper bound of the current range. Support for the single currency could be due to a brighter outlook for yields on the back of ECB President Trichet’s comments at the Jackson Hole Conference, where he called for an end of stimulus efforts from governments. However, we haven’t seen that bias translate into market instruments with overnight index swaps lower on the day, discounting its potential impact. Risk appetite has been a main driver price action for the pair, but today we saw most of today’s gains accumulate when European equity markets were lower and its recent losses during a positive U.S. session. Despite, the uncharacteristic volatility, the broader trend is toward safety which could limit upside potential for the pair despite any short-term bid that it finds on yield expectations.

Levels to Watch:

-Range Top: 1.2750 (Range, SMA)

-Range Bottom: 1.2600 (Range, Fibo)

Suggested Strategy

• Short: Place an entry at 1.2775-Range top
• Stop: Set the stop to 1.2850-above the 8/20 high
• Target: The first target is 1.2625-8/31 low

Trading Tip – Considering the level of event risk at the end of the week, if don’t see our set-up triggered beforehand, we may sit on the sidelines. However, a hawkish ECB followed by a disappointing NFP report could generate the desired price action. Yet, I wouldn’t recommend chasing any moves it we see a spike in volatility exhaust near our target levels then a position could be justified. Since we are dealing with a narrow range, traders that miss out on an opportunity to get short the pair may chose to wait for a failed test of support for a bullish position. Indeed, the 50.0% Fibo of 1.1876-1.3336 at 1.2605 has withstood an initial test adding to its validity. Considering the building pessimism over global growth, downside risks could be greater for the EUR/USD and a break of support may lead to an extended bearish move.

Event Risk for Europe and U.S.

Europe – An ECB rate decision is the biggest event risk on the economic calendar and the recent comments from President Trichet will increase the interest level. The potential exists for a change in rhetoric from the prevailing “risks remain balanced” to a more hawkish stance, which could generate Euro support. The second reading of manufacturing PMI will most likely be overlooked ahead of the policy meeting. Meanwhile, producer prices in August could spark volatility as wholesale prices are expected to have accelerated to 3.9% from 3.0% adding to the case for a rate hike. Second quarter growth figures and retail sales from July are lagging indicators but a strong showing will breed confidence in the region’s recovery.

U.S. – Forecasts for the manufacturing sector to have weakened and a job loss of 100,000 in the world’s largest economy may spark a flight to safety. Equity markets have been under pressure and increasing risk aversion still favors the dollar. However, we have started to see a dimming growth picture in the U.S. become a weighing factor for the greenback which could be the case following a disappointing labor report, if markets re-establish their belief in the decoupling theory.