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Volatility seems to be settling as the global effort to stabilize the rift in investor and lender confidence takes the reins on market activity. While we should remain cautious, it is still important to change with the market conditions.

Why Would EURUSD Stay in a Range?   ·         Levels to Watch: -Range Top:       1.3770 (Fibs, Pivot, Range) -Range Bottom: 1.3315 (Pivot, Swing Low)   ·         Volatility has certainly settled over the past 24 hours despite an announcement from the Treasury that they would sweeten their bailout plan by insuring all senior debt from financial firms and buy $250 billion in banks’ preferred shares. It seems there is at least a temporary balance between the short-term relief from the financial crisis and the outlook for a global recession. What’s more, as a result of the crisis, both the ECB and Fed are looking at rate cuts.   ·         It is always difficult to pull up reliable technical levels after an aggressive move that covers significant ground. However, EURUSD nonetheless comes equipped with enough of a technical backdrop. Resistance is our main concern at 1.3775 as a range high – though there are notable fibs at 1.3835 and 1.3880 as well as a clear pivot. Suggested Strategy   ·         Short: We will set a limit orders for a short on two lots at 1.3770 ·         Stop: The initial stop will hold to the short-term range at 1.3815, but it won’t account for a push to the bigger fibs. When the first target is hit, the stop on the second will move to breakeven. ·         Target: The first target will be set equal to risk (75) at 1.3665. The second objective is 1.3590.

Trading Tip – Volatility seems to be settling as the global effort to stabilize the rift in investor and lender confidence takes the reins on market activity. While we should remain cautious, it is still important to change with the market conditions. After the massive rallies and breakouts of the past two weeks to three months, it is naturally difficult to spot reliable ranges. However, with recent congestion, EURUSD represents one of the best opportunities for a short-term range trade. While there is support in a major 61.8% Fib retracement confirmed with Friday’s swing low, our primary interest is in resistance as the dominate trend is bearish and there is far more technical build up to the upside. The entry is aggressive and the stop doesn’t allow for any jumps in volatility that could test the more significant levels of resistance in a collection of Fibs, a pivot zone and a former rising trend support level. As such, these orders should only be kept open for a few days. If volatility increases dramatically, cautious traders would do well to avoid cancel orders and keep out.

Event Risk Euro Zone And US

Euro Zone – The Euro Zone is in the same boat as most of its major counterparts – risk has altered the fundamental outlook for the economy and interest rate expectations. In the past few weeks and months, growth forecasts have deteriorated to near certainty of an impending recession. More importantly, after the ECB lowered rates last week in the coordinated policy easing, there is no longer a hold out in inflation for a potential argument for rate hikes. Today, ECB President Trichet suggested the bailout was completely necessary and that he expected inflation to temper with the downturn in growth. Where does that leave us with this coming week’s event risk? The Euro Zone CPI and German PPI numbers will likely have little to no influence on price action. Besides these numbers, there is no other data of significance due.

US – Despite a relatively hearty listing of event risk this week, the US economic calendar is not expected to translate into significant price action from the dollar. Today, the Treasury announced they were tightening the safety net of the bailout with plans to guarantee financial firms’ senior debt and invest in banks. If this were Monday, this news would have sent risk appetite soaring; but a lack of reaction today suggests these elements are losing their influence over the market. Looking to the economic docket, the consumer inflation data for Thursday will have a reduced impact on price action – unless the indicator drops and boosts expectations for a cut. Growth numbers will be more interesting though as a recession approaches; so the retail sales and confidence figures will be notable. 

Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John at jkicklighter@dailyfx.com.