High Risk And High Reward On A EURUSD Range Setup

Why Would EURUSD Hold a Range?   ·         Levels to Watch: -Range Top:       1.3350 (Pivot, Fib, SMAs) -Range Bottom: 1.9525 (Trend, Double Bottom)   ·         The most liquid pair in the currency market is hanging on the edge of a significant breakout; and many of its less active counterparts are following suit. Clearly, this is a precarious position to call a range; however, without a fundamental driver, a break may be difficult to accomplish. While there is significant event risk in Thursday’s ECB rate decision and Friday’s non-farm payrolls, that leaves three active sessions free of data.     ·         A range on EURUSD is a dangerous proposition from a technical standpoint as well. While the rising trend and possible double bottom at 1.2775 are encouraging, it is hard to ignore the significant momentum behind the short-term (hourly) bear trend and the general bias on the higher time frame as well. At this point, resistance is more substantial.     Suggested Strategy   ·         Short: Half-size (or smaller) entry orders on a break of the falling trend can be set at 1.2860.   ·         Stop: An initial stop at 1.2720 is below the range bottom to account for potentially high volatility. To secure profit, move the stop on the second lot to breakeven when the first target hits. ·         Target: The first objective equals risk (140) at 1.3000. A second target is 1.3140.

Trading Tip – Many of the market’s most liquid currency pairs are on the edge of major breakouts, rending any potential range trade a high risk proposition. One that certainly holds its weight in risk – but that also establishes an equally enticing potential for return – is EURUSD. Such a setup is only for those comfortable with risk; and even with a healthy appetite for danger, we still need to lay out a sound strategy to avoid the significant threat of an unfavorable breakout. The most immediate issue is the steady, bearish momentum derived over the final two sessions of trade this week. We need to see a break from trend to signal the potential for a reversal on nearby support. Therefore, a close from a higher time frame bar (60, 240-minute) that breaks this trend would be best. However, for a hard level, we have set 1.2860 as that level. Our stop is wide enough to cover our range low with a modest buffer- but nothing that will absorb too much loss on a genuine breakout. The first suggested target cover risk; but the second is very aggressive considering the market’s bias. Momentum is more important to taking profit than a hard-fast level. Another key issue is to avoid the major event risk on both sides of the pair. We will cancel all open orders, and tighten stops on active positions, before Thursdays ECB rate decision.

Event Risk Euro Zone And US

Euro Zone – While the economic docket thins out somewhat for the euro (a significant amount of German data has been released over the past two weeks), those indicators on the calendar have real market-moving potential. Topping the list is the European Central Bank’s rate decision scheduled for Thursday. The policy authority has steadily lowered its benchmark lending rate for a number of months and the market has become conditioned to expect the group to maintain their pace towards the zero interest rate policy that the world seems to be pursuing. However, bank President Jean Claude Trichet has disturbed the market’s comfortable sense of certainty when after the last policy meeting he suggested that the next important meeting wasn’t until March. From the usually transparent policy maker, this is taken as a clear sign as a pause in February. Other than scheduled event risk, the euro may also find volatility from the euro’s general economic outlook. With debt downgrades, disparity in member economy recessions and isolated bailout efforts, serious doubt is growing over the health of the world’s second most liquid currency.

US – A significant wave of event risk has passed for the US dollar this week, but there will be no rest for fundamental traders in the days ahead.  In effect, this past week’s FOMC rate decision and 4Q GDP reading reminded us what the true underlying trend really are for the world’s reserve currency. The rate decision passed (as expected) without a real change in rates (as they are essentially at zero) or a notable shift in the Fed’s creative efforts to ease the economic and financial crunch. Equally disturbing was the sharpest decline in growth in 26 years. This highlights the trouble the world’s largest economy is still facing despite all the government’s efforts. The economic outlook will remain in focus with spending, credit, factory and service sector activity, and finally employment readings. This will offer a timelier read on the pace of growth following the better-than-expected 4Q growth numbers.

Questions? Comments? Send them to John at jkicklighter@dailyfx.com.