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Beware the ECB

Beware the ECB

2014-05-08 03:54:00
John Kicklighter, Chief Currency Strategist
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Most event risk lately - even high profile items like last week's FOMC rate decision - have failed to generate FX volatility for breakouts or trends. The problem is that these events are competing with dominant concerns and their outcome simply isn't 'shocking' enough. The upcoming ECB decision speaks directly to what concerns the Euro, the central bank has positioned itself squarely against the market and there is relatively little sway from traditional risk trends. Beware the ECB.

If the ECB decides to repeat its status quo position it could very well incite the market to override hesitation and set off a rally (see today's Strategy Video on the policy meeting to learn why). That is a danger to my EURUSD short position. However, the central bank no doubt recognizes its position, and is likely taking it into account for its monetary policy decision. I will widen my stop out another 50 pips to account for volatiltiy, but the battle is there. If the ECB simply 'gives up' and allows the Euro to continue appreciating, I'll let the stop take the trade out.

I am also still holding my EURAUD short playing the neckline as resistance. This is not as exposed to a soft hand from the central bank, but the liquid pair can drag more pairs with it. For scenarios, the only pair I truly like for a strong Euro break - a move that shows an ECB sitting on its hands with no upgraded threats of future stimulus - would be EURGBP should it break above 0.8235.

Otherwise, my interest in the Euro remains with the central bank's effort to forgo future economic, financial and inflation issues by easing monetary policy or signaling an imminent move. Another cross on my radar is EURJPY should it break 141, but to trade anything beyond a short-term breakout, I'd need risk aversion to fortify the move.

Join Christopher Vecchio as he covers the ECB rate decision live in DailyFX-Plus.

In the meantime, I still have my GBPAUD short on looking to account for a retreat in recent BoE rate hike expectations. My long-term long USDCHF position carries some correlation exposure to EURUSD, but the EURCHF aspect would help fortify a floor. My long-term AUDNZD long is back in the green, but I'm still waiting for 1.09 to break for trend.

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