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Euro Breaks Down, and Here are the Key Factors We're Watching

Euro Breaks Down, and Here are the Key Factors We're Watching

2014-07-28 15:15:00
David Rodriguez, Head of Business Development
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- Euro breaks key lows to trade at its lowest levels of the year

- Extremely one-sided positions remain a warning, but losses not done yet

- Forex volatility prices spike ahead of key week of US Dollar event risk

The Euro trades at fresh yearly lows, but can it realistically fall further? These are the key factors and price levels we’re watching.

A look at professional trader positioning shows that large speculators are now at their most net-short the Euro versus the US Dollar since the currency traded near the $1.20 mark in 2012. This in itself warns that the move may be overdone; if everyone’s short there’s no one left to sell. Yet sentiment can and has remained extreme for extended periods of time, and momentum favors continued weakness.

Large Speculators Heavily Short Euro versus US Dollar

Euro Breaks Down, and Here are the Key Factors We're Watching

Data Source: CFTC Commitment of Traders data, Bloomberg

Forex volatility prices have recently spiked to their highest levels in a month as traders gear up for an important week of US economic event risk. In essence this suggests that many are betting on/hedging against further USD moves and increases the likelihood of further EURUSD declines.

Forex Volatility Prices Bounce on Key Week for US Dollar

Euro Breaks Down, and Here are the Key Factors We're Watching

Data source: Bloomberg, DailyFX Calculations

How might we play Euro weakness and broader Dollar strength here? Last week we noted that a Euro close below $1.3460 pointed to a larger breakdown, and indeed it would take a rally above $1.3700 to shift our bearish trading bias. Key short-term levels to watch include support-turned resistance at $1.3460 and November, 2013 lows of $1.3400 and $1.3300. We like selling short-term bounces on the Euro.

See the table below for full rundown on a per-currency pair basis and keep track of changing conditions with future e-mail updates via my distribution list.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

Euro Breaks Down, and Here are the Key Factors We're WatchingEuro Breaks Down, and Here are the Key Factors We're Watching

Automate our SSI-based trading strategies via Mirror Trader free of charge

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

To receive the Speculative Sentiment Index and other reports from this author via e-mail, sign up to David’s e-mail distribution list via this link.

Contact David via Twitter at http://www.twitter.com/DRodriguezFX

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 90-day 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 90-day 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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