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Euro Forecast Bearish but Forex Options Warn of Sideways Chop

Euro Forecast Bearish but Forex Options Warn of Sideways Chop

2012-06-25 16:00:00
David Rodriguez, Head of Product
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DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

euro_us_dollar_forecast_forex_options_body_Picture_1.png, Euro Forecast Bearish but Forex Options Warn of Sideways Chop

DailyFX PLUS System Trading SignalsSharp Euro declines against the US Dollar (ticker: USDOLLAR) to start the week’s trade suggest that we could see further losses into the week ahead. Yet an important drop in forex options market volatility expectations limits the likelihood of major moves for the EURUSD and other major currency pairs.

Last week we warned that especially indecisive forex market conditions warned of sideways price action, and indeed we see many of the same risks going forward. The major fundamental issues for the Euro remain relevant as markets anticipate a key European summit at the weekend. All else remaining equal we would expect negative sentiment to keep downward pressure on the EURUSD. Yet indecision could force sharp intraday volatility within the broader downtrend.

Clear uncertainty across markets emphasizes the need for strong money management techniques amidst fast-changing market conditions. The sharp drop in market volatility limits our enthusiasm for our “Breakout Opportunities” and Breakout2 automated trading strategies, while broader trends are reasonably supportive of our “Trend Follower” and “Tidal Shift” systems (Momentum1 and Momentum2, respectively).

It could be another challenging week for market conditions, and caution is advised ahead of the weekend’s key European summit that threatens significant uncertainty across European currency pairs.

Market Conditions:

Forex options market volatility expectations have dropped noticeably on what is shaping up to be another week of challenging trading conditions. The DailyFX 3-Month Volatility Index is now below the psychologically significant 10% mark for the first time since early May. If this is indeed the start of lower volatility across the board, we will likely see price action slow down across the board and through often-directionless summer trading.

euro_us_dollar_forecast_forex_options_body_Picture_2.png, Euro Forecast Bearish but Forex Options Warn of Sideways Chop

--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com

To contact David, e-mail drodriguez@dailyfx.com

To be added to David’s e-mail distribution list for this and other reports, e-mail subject line “Distribution List” to drodriguez@dailyfx.com

Definitions

Volatility Percentile – The higher the number, the more likely we are to see strong movements in price. This number tells us where current implied volatility levels stand in relation to the past 90 days of trading. We have found that implied volatilities tend to remain very high or very low for extended periods of time. As such, it is helpful to know where the current implied volatility level stands in relation to its medium-term range.

Trend – This indicator measures trend intensity by telling us where price stands in relation to its 90 trading-day range. A very low number tells us that price is currently at or near monthly lows, while a higher number tells us that we are near the highs. A value at or near 50 percent tells us that we are at the middle of the currency pair’s monthly range.

Range High – 90-day closing high.

Range Low – 90-day closing low.

Last – Current market price.

Bias – Based on the above criteria, we assign the more likely profitable strategy for any given currency pair. A highly volatile currency pair (Volatility Percentile very high) suggests that we should look to use Breakout strategies. More moderate volatility levels and strong Trend values make Momentum trades more attractive, while the lowest Vol Percentile and Trend indicator figures make Range Trading the more attractive strategy.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.

ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES IS MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION.

OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. Any opinions, news, research, analyses, prices, or other information contained on this website is provided as general market commentary, and does not constitute investment advice. The FXCM group will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance contained in the trading signals, or in any accompanying chart analyses.

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

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