EURUSD: Into next week

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

The focus for the USD is now on relative growth prospects, rather than borrowing costs. So says Bo Nielsen over at Bloomberg. Contrast this with the shills over that DailyFX, who say the EURUSD could crack 1.5000 in the next week. But of course many of the pundits are hedging their bets by writing that as of this week a dollar rally looks very possible. From what I see, they could be right. A look at the majors reveals a mixed picture, with some patterns shaping up for technical reversals. Orders, for the brokers that make this information public, are predominantly net short on the retail side. In terms of daily and weekly ranges, the picture is decidedly mixed with pressure still firmly on the USD. Simply put, the relative outlook for the USD is improving, in the context of significant risk for a break above 1.5000.

EURUSD has printed a bearish outside day at Friday’s close, suggesting a double or triple top on the daily charts, depending on how you look at it. This is by no means a reversal. Daily reversal patterns often failed at psychological price points in the past, where demand (read: greed and/or panic) overrode technical and fundamental considerations. There seems to be a similar fever pitch for the fall of 1.5000 to what we saw with 1.3000 in December of 2004. (The first test failed in January 2004, printing a double top and performing to spec.) Technically, it wouldn’t violate the fundamentals too much for 1.5000 to crack this time around — fundamentally derived values are very elastic in the spot markets. Supporting the argument for a move to the upside is the consolidation in the 1.4300 to 1.4950 range, suggesting a possible bullish pennant or flag on the daily chart. If the pattern is true, my next target for this pair would be just below 1.6000. A failed pattern would suggest a target of 1.3650.

The hourlies suggest, for the moment, ranging action with a probable retracement to the 1.46 handle. There are a few levels of support on the way, so it could be a grind lower. My bias for swing trades is to look for short plays from 1.4890/1.4900 on Monday with strong intraday confirmation. I my even consider selling a rally below 1.4850. This is what my model is telling me, at any rate, and any decision will depend on the technical picture at Monday’s London session open. If I see a range developing, I would consider small longs starting at 1.4750, with my mood improving for longs toward the 1.46 handle. A true swing play would again be a long trade at 1.4450, but I would reduce size to accommodate the necessary wide protective stop. I don’t expect an opportunity at this price point for several days, however.

The idea behind these trades is to exploit average daily excursions, keeping size small and reducing risk by aggressively adjusting protective stops, taking partial profits or closing trades at the first reasonable signal. These are considerations for the hourly charts only. On the daily charts, my bets are long between 1.44 and 1.45, targeting 1.48 and possibly higher, depending on respective interest rate and macroeconomic outlooks for the base- and countercurrency as they unfold.

I have a few discretionary trades already planned in the event new highs are established. They basically involve trading any clean pullbacks of breaks above at round number support, or where obvious areas of stop clusters have been wiped clean. Possible areas could be 1.4975/1.4980, 1.5000, and 1.5020/1.5025. I am not at all sure this pair will crack 1.5, but if it does, it makes sense to take the risk and trade long at intraday value.

There is a lot going on with the USD and the EUR. I could write about the COT report. I could write more about interest rate outlooks at 3 months, six months and one year. I could write more about production, consumption and international capital flows. I could also write more about bond yields, commodities and the futures markets. And of course there are the options plays to consider in tandem with volatility studies. All of these can assist with identifying spot prices at which trade opportunities may be found, on both long term and intraday charts.

My gut tells me this pair will be choppy throughout the week as fresh data is released. Of course, whenever I say this, the pair moves cleanly. So take what I have to say with a grain of salt. I’m sticking to my models, while being fully aware of significant event risks playing out and with more to come. I’m keeping bets small.

I’ve got my eye on other charts – and there are some beauties out there, but time constraints limit me from more posting more write-ups. Tomorrow, I may write something up on the USDJPY and it’s crosses, or the EURGBP, or the GBPUSD.

Gav: Take a look at the EURAUD daily chart. (I’m sure you’ve been watching it.) Could be an interesting fade play if price bounces back up into the busted pattern.

TLT

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com