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Fed, EU Politics Paves Way for EUR/USD Short Targeting August Low

Fed, EU Politics Paves Way for EUR/USD Short Targeting August Low

Daniel Dubrovsky, Strategist

EUR/USD Trading Strategy: Pending Short at 1.1672

  • Italian budget worries sent EUR/USD under trend line, more EU political jitters to come
  • Meanwhile the Fed continues to be on a relatively more hawkish path compared to ECB
  • With prices below the optimal entry point, an order has been placed to sell Euro at 1.1672

Build confidence in your own EUR/USD strategy with the help of our free guide!

Fundamental EUR/USD Short Argument

On September 27th, the Euro experienced its largest decline against the US Dollar on the daily chart since August 10th as it fell 0.88%. This was largely in part due to increased Italian political jitters as the anti-establishment parties agreed on a budget proposal that is at odds with Eurozone fiscal rules. Italian government bond yields rallied, signaling a rising premium for the associated risk.

The proposal put together by the nationalist League and populist Five Star Movement could end up weighing against the Euro in the medium-term if the European Commission ends up approving the plan. This is because other nearby nations, such as Greece, may question their leniency which could give more rise to economic nationalism at the expense of market financial stability. Political gridlock in Sweden is also a threat for EUR.

Meanwhile, from a yield and fundamental perspective the US Dollar is at a clear advantage against its European counterpart. The Fed has just raised rates to a range of 2.00 – 2.25 percent while the ECB is only just preparing to exit its asset purchase program potentially by the end of this year. For the latter, rates may be left unchanged through the summer of 2019 while the former keeps hiking perhaps three times next year.

EUR/USD Technical Analysis and Trade Setup

The Euro has remained in a persistent consolidation mode against the US Dollar for the better part of the past four months or so. However, there is a sign on the EUR/USD daily chart that its next leg could be lower. The pair has broken under a near-term rising support line from September 10th and it was an aggressive move. This now exposes a horizontal range of support between 1.1510 and 1.1526.

But EUR/USD may fall beyond that to the August 15th low at 1.1301 if the fundamental argument outlined above prevails. With that in mind, entering short seems like the way to go to capitalize on what could be Euro weakness in the coming days and weeks. However, prices are under the ideal setup for a 3-to-1 risk-reward ratio at the time of this writing.

Using the logic of a daily close stop above 1.17822 for this setup (just under the September highs), we have placed an order to short EUR/USD at 1.1672. The target of this position is just above the August 15th low at 1.13417. We will be closely monitoring this setup which may change if the entry point is not reached. You may follow me on twitter @ddubrovskyFX for updates to this trade setup.

EUR/USD Daily Chart

Fed, EU Politics Paves Way for EUR/USD Short Targeting August Low

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--- Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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