Short EUR/USD at Weekly Low

The Euro-Dollar pair continues to head south following the Greek bailout, as uncertainty over the Euro-zone’s ability to save its potentially insolvent members has come into question. Now that the debt crisis in the United States is resolved, with the debt ceiling being raised on Tuesday, market participants will turn their collective eye back on Europe, which, despite the second bailout for Greece announced under two weeks ago, continues to face problems, with Cyprus the most recent member in need of a bailout. Despite this, a European Commission spokeswoman on Tuesday announced that there were no plans to bailout any other Euro-zone countries, leaving the currency at risk. As such, with the fundamental focus back on the Euro-zone, and the EUR/USD pair sitting in the middle of a descending channel dating back to mid-April, an opportunity to swing trade the pair lower within its channel has arisen.

Levels to Watch:

-Range Top: 1.4450 (Trend)

-Range Bottom: 1.3715 (Trend)

Charts created using Strategy Trader– Prepared by Christopher Vecchio

The chart below shows the Fibonacci extensions and how the EUR/USD pair could unfold in the coming days, off of the May 4 High at 1.4939, July 12 Low at 1.3836 and the extension to the July 27 High at 1.4535.

Charts created using Strategy Trader– Prepared by Christopher Vecchio

Suggested Strategy

• Short: Place an entry at 1.4151 (Weekly Low)
• Stop: Set the stop to 1.4247 (20-DMA, 96-pip risk)
• Target 1 (Risk/Reward Ratio): 1.4013 [Mid-July Low, move Stop to 1.4101] (138/96, 1.44)
• Target 2 (Risk/Reward Ratio): 1.3836 [July Low, move Stop to 1.3983, 50.0 Fibo] (315/96, 3.28)
• Target 3 (Risk/Reward Ratio): 1.3750 (401/96, 4.18)
• Timeframe: 2 weeks

Trading Tip – The trend once again points to further EUR/USD pair losses, as all three technical indicators this report follows are now in tandem, fitting neatly in with the deteriorating fundamental picture for Europe. The daily RSI is continuing to decline, at 44, down from 60 on July 26. Similarly, the MACD Histogram moved into a bearish divergence, with the differential standing at -6, a sell signal. This is further confirmed by the Slow Stochastic oscillator, which has been trending lower since July 26, with the %K less than the %D, at 40 and 55, respectively. As such, a move lower confirming the downtrend back to the Weekly Low suggest shorting the EUR/USD pair down towards its Range Bottom, before potentially taking the other side of the trade.

Event Risk for the Euro-zone and the United States

Although a potential default by the United States was avoided on Tuesday, EUR/USD pair volatility will remain high with numerous key events remaining on the docket, with a rate decision and labor market data due in the coming days.

Euro-zone – The headline event for the week remains the European Central Bank rate decision, due on Thursday.The European Central Bank is expected to keep its key interest rate unchanged at 1.50 percent at its meeting on August 4th. On July 7, 2011, the Governing Council of the European Central Bank decided to increase the key interest rate by 25 basis points to 1.50 percent with European Central Bank President Trichet citing the reason for the increase as “essential so that recent price developments do not give rise to broad-based inflationary pressures over the medium-term.” However, a slightly chance exists of a surprise rate hike at the meeting, with the Credit Suisse Overnight Index swaps pricing in a 61.5 percent chance of a rate hike at the meeting, a move that would certainly increase price action for the remainder of the trading session. Regardless, I fully expect volatility among Euro-based pairs to remain elevated as market participants shift their attention back towards the ongoing sovereign debt crisis in Europe.

United States – Although American lawmakers have reached a compromise to raise the debt ceiling, now officially signed into law by President Obama, risk remains high for the U.S. Dollar, as the major ratings agencies now have the spotlight in terms of whether or not they will downgrade the government’s ‘AAA’ rating in the near-term. As such, with three key events on the docket for Wednesday, coupled with the historically market moving nonfarm payrolls on Friday, the remainder of the week will be extremely volatile for Dollar-based pairs.

Written by Christopher Vecchio, Currency Analyst

To contact the author of this report or be added to his distribution list, please send inquiries to: cvecchio@dailyfx.com

Follow Christopher Vecchio on Twitter: @CVecchioFX