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Strong & Weak: Euro Spurts and Maintains Strength

Strong & Weak: Euro Spurts and Maintains Strength

Jeremy Wagner, CEWA-M, Head of Education


Talking Points:

-Stronger currencies (British Pound [GBP] and Australian Dollar [AUD]) have entered into a multi-year resistance zones

-US Dollar moves lower after Fed meeting, but retraces most of resulting weakness

-Euro (EUR) gains on Fed meeting and holds onto those gains to finish the week strong entering the EUR Basket Buy Trade

Last week, we highlighted how the British Pound strength has been holding up for several weeks in a row. As you can see below, the GBP is ranked as the 3rd strongest currency and that strength continued into the Fed meeting on Wednesday which helped our GBP buy basket trade.

However, the GBP has strengthened enough push into 4 year resistance on the GBPUSD chart. As written last week, “I will abandon the bullish bias on the Pound if the GBPUSD exchange rate trades up to 1.6000.” Therefore, be on the lookout for Pound weakness.

Additionally, the Australian Dollar revisited a former breakout level near .94 to.95. This zone was previously supported by swing lows in October 2011 and June 2012. A common pattern in technical analysis is when former support, when broken, often acts like new resistance.

Even though the AUD ranks as the 2nd strongest currency below, the recent move back into the resistance zone puts the AUD is at risk of losses for the coming week.

Forex Strategy: Matching Strong versus Weak

CurrencyUp ArrowsDown ArrowsChange From Last Week
NZD7Higher1 rankings
AUD61Lower 1 ranking
GBP43Lower 1 rankings
CHF43Higher 4 rankings
EUR34No Change
USD25Lower 1 ranking
CAD25Lower 2 rankings
JPY7No Change

Chart created by DailyFX EDU Robert Warensjo

The Federal Open Market Committee decided this past Wednesday not to taper the purchases of treasury securities and mortgage backed securities. As a result, the US Dollar immediately sold off. However, by the end of the week, the USD began to recover a good portion of those losses.

Additionally, the USDOLLAR briefly spiked below the 200 Day Simple Moving Average, then rebounded higher. The USD price action towards the end of the week has me thinking the bearish spike on news may be the last leg of the recent bear trend. We will let that thought simmer and will revisit the potential for USD strength towards the end of the week.

The currency trade opportunity for this week rests with the Euro. As the USD was rebounding, the Euro wasn’t backing down. As a result the EURUSD pair finished the week on its highs. Also, when looking at the EURUSD weekly chart, there is a cluster of resistance in the 1.3750-1.3850 range. Therefore, this indicates to me that although the USD may perhaps find support, the EUR still has room to run higher against the USD.

When wrapping this altogether we have:

-potential for AUD and GBP weakness

-the EUR finishing the week on its highs against the USD

-EURUSD potential exchange rate movement to 1.3750-1.3850

Therefore, the EUR buy basket trade seems to have a good opportunity. Trading a currency rather than a pair is a good way to spread out and diversify your exposure. This way, we are buying the EUR against a basket of currencies allowing us to isolate the valuation of the EUR.

Good luck with your trading!

Gauging relative strength of currencies is a common method employed by traders of all skill levels. The analysis is fairly simple and straight forward as previously laid out in “Know the Strong and the Weak Currencies.” The process can take about 15-20 minutes and doesn’t need to happen but once or twice per week.

---Written by Jeremy Wagner, Head Trading Instructor, DailyFX Education

Follow me on Twitter at @JWagnerFXTrader.To be added to Jeremy’s e-mail distribution list, click HERE and select SUBSCRIBE then enter in your email information.

See Jeremy’s recent articles at his DailyFX Forex Educators Bio Page.

This publication attempts to analyze and trade a currency rather than a pair. By trading a currency via a basket of trades, the profit or loss of the basket is spread out over several pairs therefore diversifying the exposure to worldwide economies. As a result, the valuation is then focused on a specific currency and its appreciation or depreciation. Currency basket trades can be placed manually through FXCM’s Trading Station II or via the Mirror Platform.

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