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Fleshing out a Strategy for EURUSD and GBPUSD

Fleshing out a Strategy for EURUSD and GBPUSD

2011-02-15 00:53:00
John Kicklighter, Chief Currency Strategist
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The currency market itself seems primed for volatility. However, the opportunity seems particularly centered on the potential built into the dollar itself. I see trading opportunities for every one of the majors - serious setups. Yet, my excitment needs to be moderated. Approaching the market in such an emotional state (whether it be excitment for opportunities / successful trades or the gloom on the back of a bad trade) is rarely beneficial. That said, I feel it is important to lay out trading scenarios for a positive and negative reaction to the event risk of the coming 24 hours and the inevitable shift in underlying risk appetite trends.

...

My first interest is the majors. There is a trade opportunity for each one. At the top of the list, EURUSD and GBPUSD are better positioned for substantial dollar gains as each has already tested their lower technical threshold (1.35 and 1.60 respectively). Reversal is certainly possible; but the congestion it would retrace into would offer little beyond a short-lived bounce. That said, potential is really charged for AUDUSD in a drop below 0.99 and then 0.98. The long-term implications of a reversal from this high are vast. NZDUSD can similarly produce a momentous break below 0.7550; but perhaps this pair is better served as a 'risk-appetite hedge' against AUDUSD. Perhaps one can be played to the long side and the other a short to precede a breakout. USDCHF and USDJPY are both looking at their own range boundaries with resistance of 0.9775 and 83.50. Again, these are similar pairs in their fundamental nature; so perhaps go long one and short the other. Otherwise, I can wait for confirmation of a definitive move. I would not likely load on on both though as they carry relatively high levels of correlation. And, then there is USDCAD. Having watched that pair on the Asian open Monday, I decided to take a long position from 0.9870 with a 70 point initial stop and first target after it held its range.

...

My interest is heavily focused on the dollar; but the bulk of event risk actually resides in other currencies' dockets. Key tomorrow is the European GDP data. Depending on how this data falls, there is a chance to see follow through on EURCAD's drop below 1.3350 and follow through on EURNZD's unsubstantiated break above its long-term trendline at 1.7850. The pound is perhaps more interesting with the CPI data. There is a lot of pressure behind interest rate expectations. If the sterling is going to rally on a high inflation reading, I would actually prefer a GBPNZD break above 2.1225. Follow through and trend generation for a bullish outcome would similar paint GBPAUD in a good light. Alternatively a bearish reaction is still very appealing for GBPNZD and GBPUSD.

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