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If Euro is Weak… and the Dollar is Weak... Where should I go?

If Euro is Weak… and the Dollar is Weak... Where should I go?

DailyFX, Research


If Euro is Weak… and the Dollar is Weak….. Where should I go?

As the Euro continues to trade higher against the Greenback, many traders are left scratching their heads as to why we are seeing these gains.

Some traders would point to the recently passed Greek Austerity plan. Traders on the other side, looking for Euro weakness, might bring to mind the rising Spanish and Irish bond spreads. The bond spreads of these two nations is of extreme importance now, as these yields can help show us how much risk the market perceives to be involved in each of these economies.

Quite simply, the higher the rate – the ‘riskier,’ the market is considering these economies to be; and the higher the propensity of a potential default.

However – the recent ‘strong vigilance,’ comment from ECB Head Jean-Claude Trichet regarding inflation leads many traders to believe that the Euro Zone will enact a rate hike at their next meeting, scheduled for next Thursday (July 7th). This could very well explain the strength seen in Euro this week, with potential strength leading up to the announcement.

However, the potential issues in Europe are very real. And in the United States matters don’t necessarily look much better as both sides of the political arena spar over the US Debt Ceiling – the whole time the head of the Treasury (Timothy Geithner) is reported to be considering stepping down from his post.

Needless to say – If I’m looking to short the Euro, I may want to look at another currency that could potentially be stronger than US Dollars.

One currency that has been quite strong that may potentially fit the bill is the Japanese Yen. Yen has shown considerable strength after the coordinated G-7 intervention (on the heels of the Tsunami, and Fukushima).

Additionally, EUR/JPY happens to show what could, potentially be, a nice setup for a short position:

Created with Marketscope/Trading Station 2

EUR/JPY has faced considerable resistance at the 117 level over the past 3 days. Notice the wick of the past 2 daily candles intersecting with this key level.

Current bullishness has pushed price right up to this 117 level – and if EUR/JPY fails to break through – I’m going to look for a potential short position. I’d like to enter a short position if momentum is strong enough to breach 116.50 – with my risk shortly above the top of the wicks of this grouping of candles. I’m looking for slightly more than 2 times my initial risk level (160 pips).

Below, you can see the entire trade outlined on the FXCM Trading Station Application – utilizing the Trading from Charts feature in which traders can place, and manage their trades without ever leaving the Charting package.

Created with Marketscope/Trading Station 2

If you would like to read more about the Fundamental situations taking place in the Europe, as well as the United States, DailyFX Analyst David Song put together a phenomenal article on the topic (link available below):

U.S. Dollar Consolidation Ahead, Euro Rally Hinges on ECB

If you would like to learn the strategy I used to place this trade, or any of the strategies we teach in the DailyFX+ Trading Course – you are more than welcome to view our On-Demand Video Course. In the 15 modules (each with 4 videos), we offer 10 unique strategies for approaching the market. The DailyFX+ Trading Course is available to all LIVE FXCM customers. You can click on the link below for access:

DailyFX+ Trading Course

On top of the DailyFX+ Trading Course, we host live webinars 3-4 times per trading day in which we chart and diagram our trades, and student-traders can ask us questions in real-time about strategies, setups, or current market conditions. You can navigate directly to the DailyFX+ Trading Room from the link below:

DailyFX+ Trading Room

If you don’t yet have a live account with FXCM, you are certainly welcome to request trial access to the DailyFX+ Client Suite that is available to every live FXCM Client. You can request trial access from the following link below (sign-up field located to bottom right corner of page):

DailyFX+ Trial Access

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Thank you very much for your time, and Happy Trading!

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