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Forex Strategy Video: Top Down Trade Analysis for EUR/USD

Forex Strategy Video: Top Down Trade Analysis for EUR/USD

John Kicklighter, Chief Strategist

Talking Points:

  • EUR/USD is not only the most liquid currency cross in the FX market, it is arguably the most liquid asset in the world
  • This pair is the focal point of many crucial themes including global trade, competitive monetary policy and financial risk
  • Technically, this pair is near the top of its past two-and-a-half year high but trading activity matters

See how the DailyFX Analysts' 3Q forecasts for the Dollar, Euro, Pound, Equities and Gold are shaping up in the DailyFX Trading Guides

EUR/USD is not only the FX market's most liquid pairing, but it is arguably the most heavily traded financial measure in the entire financial system. This makes for a great trading vehicle in its own right, but it is also an important milestone for many other assets and markets. It is therefore worth analyzing this key pair whether we are simply seeking out trading opportunities in the currency market or using it as a marker for the influence of monetary policy, risk trends or financial stability for the entire system. A top-down analysis of the pair from long-term to short-term and technical to fundamental to conditions can better prepare us for trading for the week ahead and beyond.

Garnering a sense of the big picture first, the charts can quickly establish the score for EUR/USD. Using the weekly chart for my higher time frame, excluding the highs and lows through period places us at the upper threshold of a two-and-a-half year range. while the pair may have stretched temporarily up to the 1.1700-1.1600 region in two brief periods through that time frame, the bulk of the market's trade fell within 1.1500. From market conditions, we recognize that participant is throttled by a lack of conviction which in turn makes substantive breakouts with the potential for follow through low probability events. Further, fundamentals on this scale reverts to more thematic concerns. Relative monetary policy no longer simply defaults to chasing the currency with the highest yield and vows for more - rather the novelty factor of an ECB potentially following in its distant footsteps promises greater appeal. The 'risk' complications of recent years and growing geopolitical complications further add to the shift in preference through the 'medium term.'

Given the prominence of technical boundaries, the unresolved fundamental themes and difficulty with forging lasting trends market wide favors trading on a lower time. When we refer to 4 hour, 1 hour or low charts; we inherently must adapt a lower exposure, tempered time frames and more proximate objectives to suit what is collectively possible at that level. In this light, the contrarian reading from the persistent bearish holding from the speculative rank looks more aligned with prevailing conditions than a short-sided reach for unrealistic returns. How should we approach trading EUR/USD and what are the considerations that could turn the baseline view on its head? We discuss that in this weekend Strategy Video.

Forex Strategy Video: Top Down Trade Analysis for EUR/USDForex Strategy Video: Top Down Trade Analysis for EUR/USDForex Strategy Video: Top Down Trade Analysis for EUR/USD

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