Talking Points:
- EUR/USD seeing a halt at the 1.10 handle
- ECB’s rate decision and press conference in the spotlight ahead, could spur significant moves
The EUR/USD is seeing an apparent corrective move higher at the time of writing, after finding support at the 1.10 handle. The pair has been trading sideways since the Brexit decline, but the latest swing lower might see further momentum with the huge event risk on the docket.
The ECB’s rate decision takes center stage in the hours ahead. Dovishness by the bank could potentially induce a straightforward response by the market when it comes to the pair, and send the Euro lower.
Taking this into consideration, we look to find short term trading opportunities using the Grid Sight Index (GSI) indicator.
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The European Central Bank (ECB) Rate Decision is the main event risk of the week, and is set to hit the wires 11:45 GMT. The ECB is expected to keep policy at status quo in today’s meeting, but the decision and the following press conference should not be taken lightly given the possible implications and issues at hand.
Initial market focus might be on the ECB’s response to the unfolding Brexit scenario. Draghi has predicted that the Euro-Zone is likely to take a hit to growth as a result of the referendum. In turn, this might imply that the central bank might need to take further stimulus measures to boost the economy.
Making thing more complicated is the fact that the central bank is already at the extreme spectrum of monetary policy, and record low bond yields across the board (as a consequence of a perceived flight to safety after Brexit) makes the bank’s purchasing target difficult to achieve under current assets minimum yield rules.
In turn, the central bank might lay the groundwork for possible action in September (when updated projections are available), and comments are expected on possible changes to the eligible assets on the backdrop of the low yields debacle. An extension of QE might be a possibility today as well.
If Draghi can drill down a message of anticipated measures and willingness to act, this could provide reassurances to boost risk appetite, and send the Euro further lower.
EUR/USD 3-Min GSI Chart: July 21, 2016
The EUR/USD is trading at an area of resistance around 1.1035 (see chart below) at the time of writing. Indeed, the GSI indicator suggests that the majority of similar past momentum events saw movements to the downside. The 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 EUR/USD has seen reduced volatility, trading sideways since the Brexit vote. With that said, the pair might continue to see more directional conviction with strengthening Fed rate hike speculation, and the possibility of the ECB signaling further easing intentions. In turn, this could imply that breakout and trend oriented plays might be appropriate ahead.
EUR/USD 30-Min Chart: July 21, 2016
The EUR/USD is currently seeing a rejection of prices above possible resistance at around 1.1035. Further levels of potential resistance on a move higher might be 1.1050, 1.1075, the 1.11 figure and zone below 1.1150.
Levels of possible support on a move lower may be the 1.10 figure, 1.0970, 1.0950, 1.0928 and the 1.09 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 49.1% of traders are long the EUR/USD at the time of writing. Judging by the price action and the SSI swings, it appears traders flipped net long around the 1.10 support for a quick profit at current resistance levels, only to reduce net position to just slightly short at the time of writing.
You can find more info about the DailyFX SSI indicator here
--- Written by Oded Shimoni, Junior Currency Analyst for DailyFX.com
To contact Oded Shimoni, e-mail oshimoni@dailyfx.com
