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US Dollar Set to Bounce vs Euro as Markets Trade in Range

By , Quantitative Strategist
30 April 2012 16:00 GMT

The US Dollar (ticker: USDOLLAR) is set to bounce off of recent range lows against the Euro, Japanese Yen, and other major counterparts as forex market volatility suggests range trading will be the top strategy in the week ahead.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

forex_strategy_outlook_us_dollar_forecast_to_rally_body_Picture_1.png, US Dollar Set to Bounce vs Euro as Markets Trade in Range

DailyFX PLUS System Trading SignalsThe US Dollar (ticker: USDOLLAR) remains in a broad range across the board, and we believe that extremely low forex market volatility points to a USD bounce as it trades near important support levels.

Indeed, we see good fundamental justification for a USDOLLAR bounce as markets unwind recent moves. In concrete terms, this means that market conditions suggest the Euro/US Dollar is unlikely to break significantly higher. Risk is well-defined to the topside at April highs of $1.3380, while downside targets would be April lows near $1.3000.

For other currency pairs our outlook is less USD-bullish. The British Pound/US Dollar continues to hit fresh high as the GBP outperforms. We are reticent to sell into strength given that risk is quite wide, and it’s not often wise to sell such clear strength. The Japanese Yen is in a similar position, but it serves to note that risk on a long position is fairly well-defined at significant congestion of ¥78. Time will tell whether the USDJPY uptrend remains intact.

Market Conditions:

Forex options market volatility expectations continue to tumble, and we have little choice but to favor low-volatility range trading strategies until further notice. There is obvious risk that this is simply the calm before the eventual storm, and a return to more volatile conditions is entirely possible. Yet we won’t go against the trend, and that trend remains sideways for major FX pairs.

forex_strategy_outlook_us_dollar_forecast_to_rally_body_Picture_2.png, US Dollar Set to Bounce vs Euro as Markets Trade in Range

--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com

To contact David, e-mail drodriguez@dailyfx.com

To be added to David’s e-mail distribution list for this and other reports, e-mail subject line “Distribution List” to drodriguez@dailyfx.com

Definitions

Volatility Percentile – The higher the number, the more likely we are to see strong movements in price. This number tells us where current implied volatility levels stand in relation to the past 90 days of trading. We have found that implied volatilities tend to remain very high or very low for extended periods of time. As such, it is helpful to know where the current implied volatility level stands in relation to its medium-term range.

Trend – This indicator measures trend intensity by telling us where price stands in relation to its 90 trading-day range. A very low number tells us that price is currently at or near monthly lows, while a higher number tells us that we are near the highs. A value at or near 50 percent tells us that we are at the middle of the currency pair’s monthly range.

Range High – 90-day closing high.

Range Low – 90-day closing low.

Last – Current market price.

Bias – Based on the above criteria, we assign the more likely profitable strategy for any given currency pair. A highly volatile currency pair (Volatility Percentile very high) suggests that we should look to use Breakout strategies. More moderate volatility levels and strong Trend values make Momentum trades more attractive, while the lowest Vol Percentile and Trend indicator figures make Range Trading the more attractive strategy.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.

ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES IS MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION.

OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. Any opinions, news, research, analyses, prices, or other information contained on this website is provided as general market commentary, and does not constitute investment advice. The FXCM group will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance contained in the trading signals, or in any accompanying chart analyses.

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30 April 2012 16:00 GMT