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US Dollar Sell-Off Offers Buying Opportunity versus Euro

US Dollar Sell-Off Offers Buying Opportunity versus Euro

2012-07-16 16:00:00
David Rodriguez, Head of Product
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An important US Dollar (ticker: USDOLLAR) sell-off against the Euro through the early London session may offer an opportunity to get short EURUSD within the overall downtrend.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

forex_strategy_outlook_forecast_us_dollar_euro_body_Picture_1.png, US Dollar Sell-Off Offers Buying Opportunity versus Euro

DailyFX PLUS System Trading SignalsThe Euro started the week higher against the US Dollar (ticker: USDOLLAR), and a sharp EURUSD bounce through Monday’s price session suggests that the pair could see further upside. Yet our Euro forecast continues to favor EURUSD weakness, and indeed we believe this may represent an attractive opportunity to sell EUR into its broader downtrend.

Our proprietary sentiment-based trading strategies recently went short Euro/US Dollar into clearly one-sided trading crowd sentiment. The positions have since been closed out at a profit as the Euro bounces off of recent lows. Yet current crowd positioning measures continue to favor Euro weakness, and indeed a sharp drop in forex market volatility expectations gives little reason to expect any sharp deviation from the trend.

Our DailyFX Volatility Indices are now near their lowest levels since May as traders seemingly position themselves for modest currency moves. Yet the sheer strength of the Euro trend leaves us in favor of trend trading strategies across several currency pairs. The US Dollar remains attractive against the Euro and other European currency pairs.

One critical exception is the Australian Dollar, where low volatility favors AUDUSD strength. In fact a bearish EURUSD bias and bullish/neutral AUDUSD forecast combines to keep us watching for further EURAUD lows.

Market Conditions:

Forex options volatility expectations have tumbled as price action slows. We will avoid our high-volatility Breakout strategies until further notice, while several trend and range-based systems look attractive given broader forex market price action.

forex_strategy_outlook_forecast_us_dollar_euro_body_Picture_2.png, US Dollar Sell-Off Offers Buying Opportunity versus Euro

--- 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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