pairs to range trade

How Will A Rebound In Liquidity Influence EURUSD On The Edge Of Its Range?

Friday, 02 January 2009 20:05:56 GMT  |  John Kicklighter, Currency Strategist

Many of the majors are nestling right up to major technical levels at the end of a very illiquid week. This is a risky set of circumstances for low-volatility, range trading; but a reduced EURUSD position could prove worthwhile.

Why Would EURUSD Hold A Range?   ·         Levels to Watch: -Range Top:       1.4150 (Pivot, Fib) -Range Bottom: 1.3825 (Pivot, Fibs)   ·         It is a risky proposition to formulate a range trade in any major that is so close to a breakout just before the end of an extremely illiquid week. However, the immediate fundamental outlook for the first full week of trading for the new year does not threaten a shift in sentiment and therefore a breakout. Risk aversion has not been swept up – and certainly not to the extent need to make the dollar top safe haven again. As for the docket, major event risk is due later on.   ·         Looking to the charts, EURUSD seems to be carving a descending wedge – an unfavorable pattern for our long bias. However, resistance is notable with multiple tests of the 1.3850/25 region, a 38.2% retracement of the most recent bull wave and a fast-approaching 20-day SMA. In scanning a range top for targets, we must account for the falling trend.   Suggested Strategy   ·         Long: Half-sized entry orders will be set at 1.3850 – aggressive but very near spot.   ·         Stop: An initial stop at 1.3750 is intentionally wide to ensure against a false breakout. To secure profit, move the stop on the second lot to breakeven when the first target hits. ·         Target: The first objective equals risk (100) at 1.3950. The second target will be 1.4100.

Trading Tip – Many of the majors are nestling right up to major technical levels at the end of a very illiquid week. This is a risky set of circumstances for low-volatility, range trading; but a reduced EURUSD position could prove worthwhile. There are a lot of contingencies to the suggested strategy. We have already taken a number of dollar-based setups this past week, the market looks as if it will close right on the cusp of a potential breakout for a number of the most liquid majors, USDJPY has already marked a significant break from a multi-month trend and volatility is very uncertain with market depth returning to normal next week. This setup is clearly for those that are comfortable with risk; and even then, it would be good policy to wait for the market to reopen next week and ensure that the market is reversing course before entering a position or orders. Aside from that, we have cut our position size to lower the risk to our account. We have also widened stops to avoid a false break and widened stops to compensate for the risk. Additionally, there is a lot of event risk next week; so we will cancel any open orders by Wednesday. 

Event Risk Euro And US

Euro – For the euro, fundamentals have fallen more towards general themes over the past few weeks than any specific event risk. However, the tables may turn in the week ahead. Looking at the European dockets for the period ahead, the event risk will slowly build up. The first few days of next week will be tied into secondary sentiment gauges and final PMI reports. However, the notable release will be the Euro Zone CPI estimate, which will define inflation trends into the next policy decision. As the days wear on, Euro Zone CPI, unemployment, retail sales, German joblessness and other reports will certainly up the ante. All of this will be judged on how it will influence the European Central Bank’s next rate decision on the following Monday. There is no official consensus among economists for the event as of yet; but it will no doubt have a significant influence on speculation and the health of the euro. Aside from the docket, we will need to track the strength of the US dollar. If the greenback should pull back, the euro is in the best position to benefit as it is considered the optimal, liquid alternative.

US – A rebound in liquidity will likely leverage the reaction to the heavy event risk scheduled over the coming week. While we move from one scheduled release to the next, we will have to keep a weary eye on the many speeches expected from Fed policy officials. With topics like the subprime loan crisis, lending and fiscal policy, general risk trends could swell behind the dollar. However, in the absence of these vague events driving price action, economic indicators look to determine the fundamental direction of the greenback. Starting things off, we will see ISM services, pending home sales and the minutes to the last Fed meeting on Tuesday. Our biggest concern however is Friday’s NFPs. Considering the massive drop through November, December could define the US recession.

Data for January 5 – January 12			Data for January 5 – January 12
Date	European Economic Data		Date	US Economic Data
Jan 6	EZ CPI Estimate (DEC)		Jan 6	ISM Non-Manufacturing (DEC)
Jan 7	German Unemployment Change (DEC)		Jan 6	Pending Home Sales (NOV)
Jan 9	EZ Retail Sales (NOV)		Jan 6	Minutes of Dec.16 FOMC Meeting
Jan 15	ECB Rate Decision		Jan 8	Consumer Credit (NOV)
			Jan 9	Change In NFPs (DEC)

 

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

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