EURJPY Keeps Running while EURUSD Holds Back from Reversal

I thought I was going to have to make a tough decision there on Friday. Following the morning release of US NFPs, it looked like the benchmark dollar was dead-set for a true rally and meaningful reversal. The data itself was generally encouraging; but it really didn't have the surprise quotient nor did it cater to the market's real interst (the risk/reward balance between currency pairs) to set off underlying fundamental trends. Had we seen a EURUSD break below 1.40 before the weekend and/or GBPUSD tumbling below 1.5950; I'd be forced to make a critical decision. Would I jump in with a full-size position knowing liquidity would dry up; or would I risk missing a significant portion of a move by taking a cautious approach. That decision was made for me with the dollar's reversal before any serious levels were broken.

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For existing exposure; both my EURJPY and USDJPY positions would move deeper into the money. The former is performing the best; and this particular performance is a great example of why it is a good idea to have two contrasting scenarios for a currency, pair or event. The EURJPY was my long-euro setup to contrast the possiblity of EURUSD cracking 1.40. The over-due break from 10 months of congestion on the yen cross above 116 has led me to my first target this past week and put the remaining half further in the money; so trailing up my stop to plus-100 points for the second half is a smart thing to do. As for USDJPY, the intraday dollar reversal cut into the day's gains; but it was still a strong seventh consecutive daily gain.

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Looking ahead to the coming week, there is very high probability of euro-based volatility and a good chance that the dollar could post substantial gains if only it can overcome its fundamental barriers. With the Fed taking a notable hawkish shift, we await the market's assessment of whether this is a serious endeavor or not. If speculation takes root and the BoE keeps its bearing once again, I can see GBPUSD below 1.5950. As an alternative to the BoE scenario, we could see GBPJPY clear 135.00/50 or GBPCHF rally above 1.49 - both technically important levels. AUDUSD is another major to keep in mind. Eleven consecutive advances (the close higher than the open) is excessive and requires a reversal very soon. The question is how aggressive that correction will be. That is something we will need to determine when we get there and build into a position as it develops.

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The most promising opportunity in my opinion, however, lies with EURUSD specifically. The market has shown it is fully preoccupied with rate expectations by overlooking otherwise severe fundamental developments that would undermine its performance. The market has set the bar high for the ECB; what happens if they meet that outlook? What happens if they disappoint? The first scenario could keep the trend in place and lend to a moderately paced advance beyond 1.4250. The alternative take has the greatest pressure behind it and could lead to a collapse below 1.40 and shift the focus to the dollar. I'd rather see the second setup as it has the greater potential for new trends - and not just for EURUSD; but I'll play whatever happens.