Talking Points:
- EUR/USD still contained below the 1.14 handle after gapping higher yesterday
- Draghi and Yellen headline the docket but might not generate significant movement as EU referendum looms
The EUR/USD is edging slightly lower on London open after retracing yesterday below the 1.14 handle. The Euro gapped higher versus the US Dollar at the trading week open, apparently on the backdrop of polls over the weekend that seemed to favor the “Remain” side in the upcoming UK EU referendum.
The seemingly complete absorption of market focus on “Brexit” might imply that major events that can induce monetary policy speculation, such as the Fed Chair Yellen testimony and a speech by ECB president Mario Draghi could potentially have less market moving influence in the short term.
Taking this into consideration, we look to find short term trading opportunities using the Grid Sight Index (GSI) indicator.
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Euro-Zone ZEW survey might take a back sit as the market seems to shift and turn in response to “Brexit” induced volatility and opinion polls. The “Brexit” implications for the Euro appear to be significant, which could in turn explain why the currency’s main driver for the time being appears to be related to the “Brexit” sentiment swings.
Taking this into consideration might imply that the scrutinized speeches today by both Mario Draghi and Janet Yellen could have limited impact. The Fed’s Chair remarks before the Senate Banking Committee and the House Financial Services Committee could provide further information on the timing of future rate hikes, as the Fed projections are still not in line with market pricing (Fed Funds Futures do not price a hike at least until February 2017).
Traders might potentially hold back on clear directional bets stemming from monetary policy speculation before the “Brexit” vote.
EUR/USD 5-Min GSI Chart: June 21, 2016
The EUR/USD gave back some of the Asia gains, but the GSI indicator above shows that in 45% of similar past events, the pair traded higher by 12 pips and 24 pips higher 20% of past events. The GSI indicator calculates the distribution of past event outcomes given certain momentum patterns, and can give you a look at the market in a way that's never been possible before, analyzing millions of historical prices in real time. By matching events in the past, GSI describes how often the price moved in a certain direction.
You can learn more about the GSI here.
EUR/USD Technical Levels:
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We use volatility measures as a way to better fit our strategy to market conditions. The trading environment at the moment seems to represent heightened possibility for volatile moves and reactions due to the upcoming EU Referendum. Indeed the market may be underestimating the “Brexit” risk to the Euro. In turn, it may imply that breakout type trades are preferable in the short term.
EUR/USD 30-Min Chart With SPX500 Overlay: June 21, 2016
The EUR/USD is trading at a possible resistance zone below 1.1350. Other levels of interest on a move higher might be 1.1379 followed by the 1.14 handle. If the price manages to move above that level, further resistance may be found at 1.1430 and a resistance zone at 1.1467-1.1483, with the 1.15 handle lurking above.
Level of interest on a move lower could be a possible support zone below the 1.13 handle, followed by 1.1243, and 1.122. A confluence of support levels seem to sit below the 1.12 handle.
When price reaches those levels, short term traders might use the GSI to view how prices reacted in the past given a certain momentum pattern, and see the distribution of historical outcomes in which the price reversed or continued in the same direction. We generally want to see GSI with the historical patterns significantly shifted in one direction, which could potentially be used with a pre-determined bias as well.
A common way to use GSI is to help you fade tops and bottoms, and trade breakouts. That’s why traders may want to use the GSI indicator when price reaches those specific pre-determined levels, and fit a strategy that can offer a proper way to define risk. We studied over 43 million real trades and found that traders who do that were three times more likely to turn a profit. Read more on the “Traits of Successful Traders” research.
Meanwhile, the DailyFX Speculative Sentiment Index (SSI) is showing that about 42.3% of traders are long the EUR/USD at the time of writing. Retail traders flipped net short June 16, and increased shorts on the move higher, apparently trying to pick a top. This reading seems to be confirmed by the fact that short positions have been reduced slightly on the pullback lower (see the “Traits of Successful Traders” research).
The SSI is mainly used as a contrarian indicator, implying a further strength ahead for the pair.
You can find more info about the DailyFX SSI indicator here
--- Written by Oded Shimoni, Junior Currency Analyst for DailyFX.com
