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EUR/USD’s Established Range Generates Profit Opportunity

EUR/USD’s Established Range Generates Profit Opportunity

2010-03-15 15:33:00
John Rivera, Currency Analyst
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RANGE315a 

How stable is the EUR/USD Range?
Levels to Watch:
-Range Top:       1.3800 (Range, Pivot)
-Range Bottom: 1.3450 (Fibo, Range, Pivot)

• The Euro has started to regain its high correlation with risk appetite following a brief divergence due to the Greek credit issues. Meanwhile, the dollar has seen its status as a funding currency re-established as interest rate expectations have fallen. Markets started pricing in tightening from the central bank following its raising of the discount rate which saw the relationship weaken.
• Failure at 1.3800 confirms a broader range than we had previously identified. Support at 1.3450-61.8% Fibo of 1.2444-1.5149 remains solid support and markets appear poised to re-test the level before any new trend develops.
Suggested Strategy
Short: Place an entry at 1.3625-below prior congestion
Stop: Set the stop to 1.3725- my max risk level considering we have missed a portion of the move.
Target: The first target is 1.3450-61.8% Fibo, A break below would leave me in the trade to target 1.3000

Trading Tip – Risk appetite has started to wane following a week of tepid gains which could point toward a potential reversal. The EUR/USD is already under pressure and appears to be outpacing broader risk sentiment. Following the pair’s failed test of resistance at 1.3800 it appears the current range will remain intact opening the door for a test of staunch support at 1.3450. Since we may be a little late to the move we will take only a 100 pips in risk with the monumental technical level as our target. We are still willing to take a position here since we are trading with the longer-term bearish trend. A break our initial target exposes the potential for a break from the range to support at 1.3000. A sharp reversal could come with a failed test and traders should take at least partial profits once the target is hit. The looming FOMC rate decision must be accounted for, as it could initiate a new trend and potentially a new dollar paradigm.

Event Risk for Europe and U.S.

Europe – The Euro-zone consumer price report will present major event risk for the Euro as it will impact the outlook for interest rates. The ECB is determined to remain on hold as they see inflation and growth risk firmly balanced. Policy makers are forecasting short-term price stability. Therefore, a significant upside surprise may shorten the horizon for a rate hike. Economists are looking for inflation to have remained at 0.9% far from the central bank’s 2.0% target. German Zew and the trade balance report will give clues to the sustainability of demand from abroad, which has been a major source of growth.

U.S. – The FOMC rate decision could be the most market moving event for the entire week. The central bank is expected to leave rates unchanged with Fed fund futures giving a zero percent chance of a rate hike. However, any indication of a change in the timetable for tightening could generate considerable volatility and usher in a new dollar paradigm. Housing starts, and inflation data are determining factors for future monetary policy but may lose their importance in the shadow of the rate decision.

RANGE315b

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