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EUR/USD: Draghi Likely To React to China & Japan FX Actions

EUR/USD: Draghi Likely To React to China & Japan FX Actions

2016-02-01 14:30:00
Tyler Yell, CMT, Currency Strategist
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Point to Establish Short Exposure: Close below 1.0775, Due to Break of Support

Spot: 1.0875

Target 1: 1.0698 Weekly S1 Support

Target 2: 1.0567 Weekly S2 Support

Invalidation Level: Close above 1.0983 (YTD High)

Fundamental & Technical Focus:

The market seems unsure about EUR at best. On the bright side, the Bears appear to have turned their attention to the Japanese Yen after Kuroda introduced a negative interest rates strategy. Other brave (or foolish) traders are calling the bluff of the People’s Bank of China in believing that the Yuan is set for a drastic call, so they’re setting their attention on USDCNH. However, do not forget about the EUR and its downside, especially ahead of Non-Farm Payrolls this Friday.

A weaker Yuan & weaker Yen make the Eurozone less attractive from an exporting point of view because, on a relative basis, the EU’s neighbor’s goods just went on sale. Given the desire that the ECB, led by Mario Draghi to communicate their confidence to the market that they can hit their growth & inflation forecasts, we could see increasing bets on EUR bearishness as we get closer to the early March meeting. The FX market tends to move more drastically on expectations than actual news (see EUR/USD on December 3, 2015, for more details), so a breakdown in EUR/USD could be worth chasing well ahead of the ECB meeting.

Right now, our Trader Sentiment Indicator SSI is providing a neutral bias. This reading on SSI sits between -1.5 & +1.5, which shows us that positioning is not extreme, and the market is rather open to influence from external events. The ratio of long to short positions in the EUR/USD stands at -1.244, as 44% of traders are long. We would want to see a move to and through +1.5 on SSI to have the wind of SSI at our back. However, as managers of risk first, and profits second, be on the watch for a price move above 1.0966, and SSI is moving to -1.5 or deeper. Such a development would put our attention on further gains.

Chart:

EUR/USD: Draghi Likely To React to China & Japan FX Actions

You will notice that the chart above shows a condensing of price action. Markets have often found the greatest periods of volatility following periods of decreasing volatilities. Since mid-December, when the price reached 1.1058, we have seen a concession of lower highs and higher lows. Because trend continuation if favored over trend reversals, even though a reversal has to happen sometimes, a break below ‘.d.' Wave support would likely validate such a trend resumption move.

Lastly, it is worth noting that in the sideways price action that momentum looks to be overheating. In a sideways market, an oversold RSI (5) is often an early warning sign that such moves are unsustainable. Even though EUR is sitting near the highs of the session as this is being written, if price is unable to take out the zone of resistance, and subsequently, price breaks below 1.0807, we can be confident that the trend is likely to resume. Such a development would favor a move toward new lows looks like the favorable and more probable next big move in EUR/USD.

Key Technical Levels:

EUR/USD – Sideways Consolidation May Soon Expire & Downside May Resume

Second Resistance: 1.09834 YTD High

First Resistance: 1.0967/68 100-DMA, Jan. 28

Spot: 1.0888

First support: 1.0810 Jan. 29 Low

Second support: 1.0776 Jan. 21 Low

Trade Setup:

I am looking to sell EUR/USD on a confirmed break of support on the view that the large price consolidation sideways is finished, and the downtrend will continue. Given the recent new highs in US DOLLAR, I will look for momentum to resume lower toward new lows on anticipated Draghi action. A daily close below 1.07764, the January 21 low would help validate the trade setup, and our attention would be turned to the two targets mentioned above. The protective stop will be at 1.0966, right at the recent high with a preference to move the stop to break-even when prices move in the intended direction lower. This target aligns with a favorable risk: reward ratio that our Traits of Successful Traders report found to be one of the best things a trader can do to ensure long-term sustainability in your trading.

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