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A "Trade-or-Fade" Scenario for EUR/USD

A "Trade-or-Fade" Scenario for EUR/USD

2013-08-22 03:16:00
Kathy Lien, Technical Strategist

Thursday’s Eurozone PMI data is the key catalyst for EURUSD price action, and the pair could either power higher to 1.35, or possibly put in a double top and fall below key resistance at the 1.34 level.

The euro (EUR) may have lost value against the US dollar (USD) on Wednesday, but it ended the North American trading session well off earlier lows. The Eurozone's August manufacturing and service sector PMI numbers are scheduled for release Thursday, and investors are holding out hope that the data will surprise to the upside, providing additional fuel for the EURUSD rally.

Despite the pullback, 1.35 is still in sight, and a large part of the recent strength in the euro can be attributed to unexpected improvements in the Eurozone economy and disappointments in US data. However, there is very little conviction as to whether these trends can continue, which is why currencies have been so sensitive to data.

Based on stronger German industrial production, factory orders, and investor confidence, we believe that the recovery in manufacturing and services extended into the month of August. If we are wrong, however, EURUSD could drop below 1.33, putting the overall uptrend at risk.

The 1.34 level continues to be a significant point of resistance for the pair, and Thursday's PMI data could decide whether or not the recent selloff turns into a double top.

GBP/USD Looks Due for Retracement

The British pound (GBP) rose for the sixth consecutive trading day against the dollar, hitting fresh two-month highs in the process.

Government borrowing numbers were worse than expected in the month of July, with public sector net borrowing ex interventions reporting a marginal deficit of GBP 0.1 billion versus expectations for a GBP 2.9 billion surplus. July is usually a month of surplus because of additional tax receipts, but this was the first time since 2010 that July produced a deficit instead.

The public sector net cash requirement, on the other hand, was better, reporting a surplus of GBP 19.6 billion versus expectations of GBP 8.7 billion.

We feel that sterling received its strength primarily from better-than-expected manufacturing data. According to the Confederation of British Industry (CBI) industrial trends survey, orders rose at the fastest pace in two years. The order balance book was flat in August, which was the best reading since 2011 and represents a major improvement from the -12 reading in August.

The director of economics for the CBI said "UK manufacturers seem to be experiencing a build-up in momentum, but risks in the global economy still mean that it won't be plain-sailing for some time to come."

No UK economic reports are scheduled for release on Thursday, and while the GBPUSD June high of 1.5750 could still be tested, the move in the pair has become overstretched, and we feel that a retracement is due.

By Kathy Lien of BK Asset Management

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