A Range Bound Euro Presents Bearish Opportunity

A Range Bound Euro Presents Bearish Opportunity

The EUR/USD has settled into a month long range following November’s sharp sell off on the back of Sovereign debt concerns. Another bail out for a Euro-zone member (this time Ireland) and an increase in bond purchases from the ECB has helped ease concerns over the region’s stability. However, support has been limited with questions remaining over Portugal and Spain with new talk that France isn’t far behind. A recent surge in risk appetite has provided support for the pair as it maintains a 54% correlation with equity markets. The relationship has started to weaken as the greenback has started to re-couple with risk as the outlook for the U.S. economy improves. Uncertainty over the European debt crisis and the U.S. recovery could leave the pair range bound between 1.3050-1.3400.

Levels to Watch:

-Range Top: 1.3400 (Range, Pivot, SMA)

-Range Bottom: 1.3050 (Range, Pivot, SMA)

Charts created using Strategy Trader– Prepared by John Rivera

Suggested Strategy

• Short: Place an entry at 1.3450
• Stop: Set the stop to 1.3550-100 pips in risk
• Target: The first target is 1.3083-200-Day SMA

Trading Tip – The 50-day SMA has come into play just above the current range at 1.3473 and we often see a test of a significant technical level in these instances. Therefore, I am setting my entry just below and above the range top in order to position myself for a possible reversal. However, a lower daily close could open the door for further downside momentum. A move below 1.3300 could also be cause for a short trade with the same target and risk to 1.3400. A break above the 50-Day SMA could signal a break from the range and warrant a change in bias.

Event Risk for Europe and U.S.

Europe – The German labor market is expected to have strengthened further in December with unemployment rolls declining by another 15,000. A shrinking pool of skilled workers will put upward pressure on wages a main source for overall inflation. Therefore, we could see interest rate expectations rise for the Euro-Zone as the ECB could move toward tightening as they look to adhere to their price stability mandate. The EZ CPI estimate will also cross the wires and the expected 2.0%$ pace puts price growth at the central bank’s target. Also, a Portugal debt offering on January 5th should be watched to gauge confidence market’s confidence in the region.

U.S. – The U.S. non-farm payroll and ISM non-manufacturing reports will look to continue the string of strong fundamental results from the world’s largest economy. A brighter outlook for domestic growth has started to generate greenback support and signs that the service sector which accounts for 70% of GDP and the labor market are improving could be a catalyst for a bullish rally. However, weakness or in line results could see the reserve currency come under pressure as we saw when the ISM manufacturing report met expectations.