Forex-Nation EUR/USD Wrap Up

[Forexwatchman]

I wanted to share my analysis of the EUR/USD as well as receive feedback from other traders. I'll be posting here as often as I can, so if you find my analysis useful, check back often.

Wrap Up for Feb. 15-19
Yesterday and today were quite the roller coaster ride, as Ben Bernanke surprised everybody with a hike of the Fed’s discount rate at the close of Wall Street. Not surprisingly the response was immediate and all the markets were impacted. The EUR/USD collapsed to a 9 month low at 1.3444 overnight, about 20 pips above the important support line of 1.3423 that it has been eyeballing for a few weeks now. This begs the question of why was it released after the US stock markets were closed? The answer is quite important as it's a lesson in how differently "dumb money" and "smart money" reacts to economic news. They knew there would be a metaphorical S%#* storm over a relatively predictable decision that is right in line with the current forecasted U.S. economic policy and didn't want to see it get out of hand. By the time New York reopened, dumb money found itself up against a wall and smart money took over bringing the currency pair back up to pre-release levels. EUR/USD was around 1.3620 when the Fed sprung the surprise discount rate hike last night, and as of this writing the EUR/USD has climbed to 1.3603. Had you placed a buy around this week's S1 you'd be right there with the "smart" money. I wanted to place that order last night, but didn't want to stay up all night to monitor it, and plus was already in the money from my previous sell at the weekly R1. There's always another trade setup right around the corner though.

Now I don't want to sound like I'm switching sides here and saying that the euro is far stronger than it's being given credit for, because I'm not. It is still very vulnerable. The Greek PM is on the wires, inching closer to asking for economic support from the EU. And this whole 30 day wait and see decision that came out of this week's EU Summit in my opinion was a huge mistake: delaying what's already going to be a necessary action is asking for more trouble latter on down the road. Right now Greece is seeking political support, but we all know what is truly needed here is economic support. The EU has got to pull their heads out of their rear ends and prop up that country before the rest of the dominoes line up.

I predict that a nice gain of jobs in the Non-Farm Payrolls could push the EUR/USD off the cliff. It could basically shape up to be a win-win situation in two weeks when the report is released: a rise will of course show a strong American economy and send the dollar up, but weakness will also trigger more risk aversion behavior – the dollar rises as well.

Now I'm going to play devil's advocate here and make a small case for a possible rebound between now and the release of NFP. On the weekly chart, we actually have bounced off of the 61.8 fibo level of the uptrend that started this time last year at 1.2448 and rose to 1.5146 in November. 61.8 is a popular level of support/resistance in many trader's minds, and the big boys love to trade the higher time frames and thus could be eyeballing this particular area very hard. So keep this in mind as we watch what goes on from here. Tomorrow I will be posting my trades for the week, 3 went wrong and none went WAY right. Also video lessons coming real soon.

[Forexwatchman]

Last week was a continuation of our range bound trading that began Feb. 8th, and except for the fake out provided by Bernanke and friends on Thursday with the Fed discount rate hike, we continue to be range bound. Now that price action has returned to pre-release levels, I believe it shows that we are locked into a battle of fundamental and technical forces and that the parameters have been set to watch for a breakout. A return and close above 1.3800 would mean we are definitely going back up before we go down any further, while a return back below 1.3540 would mean sentiment has become more bearish and I would look for a move down to the 1.3300’s before we stall out again. My personal opinion is that we will see it reach 1.3300 and then become range bound again between that level and the current price level before the NFP is released on march 5th, at which point we could see this currency pair reach the lower 1.3100’s. But that’s just my speculation, I’ll still be watching the fundamentals and technicals very closely each day leading up to the NFP since I’m sure Greece will pop back into the headlines as the euro zone politicians continue their reluctance to deal with the 800 lb. gorilla in the room.

Here are the news events to watch for effecting the EUR/USD.

Tuesday at 4;00 am, German Ifo Business Climate comes out and generally has a decent effect on the market due to its large sample size (7,000) and historic correlation with German and wider Eurozone economic conditions.

Tuesday at 10:00 am, CB Consumer Confidence is released, a survey of about 5,000 households, measures the financial confidence of US citizens and would lend support to the idea of U.S. stability if the numbers come out at or above the forecasted 55. This has occurred three months in a row now since November so this report combined with the German Ifo Business Climate report could be a momentum builder to break this currency pair out of its’ ranges.

Wednesday at 10:00 am, several things are happening. Bernanke will be testifying and could drop one or two surprises so don’t be caught off guard that day. Also at the same time, U.S. new Home Sales data is released, so watch for that.

Thursday will see some lower level importance news coming out of the euro zone: German Unemployment Change and Consumer Confidence. But the big ones will be out of the U.S. with Core Durable Goods and Unemployment Claims both coming out at 8:30 am. Thursday’s have been some of the most active days we’ve seen so definitely still pay those reports some attention.

Friday at 5:00 am we’ll see CPI y/y and Core CPI y/y coming out of the euro zone. Forecasts and actual figures have been very close on both of these reports since November, so I would only watch for a big difference in numbers to occur in order to see these reports have any significant impact.

Friday at 10:00 am will be U.S. Existing Home Sales. With the U.S. tax credit coming to an end, look for some potential big differences in the forecasts and the actual numbers on this report as well.

[Forexwatchman]

With extremely indecisive market conditions during all the major sessions on Monday, the bulls took charge of the EUR/USD during Tuesday's Asian and early European market hours. I patiently waited this one out all day Monday and into Tuesday's Asian and European sessions until the release of the the German Business Confidence Survey which I said to look out for in my post above. German business confidence unexpectedly fell for the first time in 11 months to 95.2 from 95.8 in January and was all the fuel that bears needed to start a massive sell off that lasted for 3 hours straight and dipped over 100 pips lower before finding some support. Many are blaming the coldest winter in 14 years for shrinking retail sales and construction. As we look ahead, I am still short from my entry at 1.3667, with my S/L at break even as I await the U.S. CB Consumer confidence survey. If numbers come out far off of forecasted ones then we might see a decent rally back up and I'll be quick to close out my trade and reap the profits that I've already gained, but I don't think that will be the case, and any better than expected figures would certainly only give the EUR/USD a further push downward. We shall see in 30 minutes, I'll update with the results later in the day. Good luck to you!

[Forexwatchman]

UPDATE: Well as I warned above, the numbers did come out way worse than expected (down to 46.0 in Feb from 56.5 in Jan.) while Richmond Fed index firmed to +2 in Feb from -2. This was combined with the previously mentioned poor Ifo data as well as the downgrade of four big Greek banks which all resulted in helping to keep that country’s problems in the headlines while comments from ECB board member Gonzalez-Paramo that euro weakness is not entirely unjustified all helped continue to undermine the euro despite the U.S. numbers. The 1.3530 area was the hardest resistance level to break on the way down this morning and it is also proving to be a resistance level as the market consolidates its latest losses. Adding to that A fresh round of EUR/JPY sales is helping keep EUR/USD capped as well as the cross pairs dropping down to fresh lows on the day. My advice is to wait and see how the German GDP turns out tomorrow (2:00 am EST) and base your trading decisions off of that. If numbers don't come out better than expected we could see continued selling pressure on into the New York session when we have Bernanke testifying and U.S. New Home Sales coming out at 10:00 am. Good luck to you!

[Forexwatchman]

Euro Turns Slightly Bullish
In the blink of an eye things have changed.The EUR/USD will probably turn slightly bullish now that some major fundamental data has come out regarding both the euro and the dollar. First off, a report I wasn't planning on being a big surprise turned into one as Industrial new orders in the European Monetary Union grew 0.8% in December, much better than market forecasts of a 1.2% decrease for the month which would have extended the 0.6% fall in November. GfK German Consumer Climate was also slightly up beating expectations. This helped euro rally out to 1.3572 session high.

At 10:00 am EST Ben Bernanke's comments continued to turn the EUR/USD slightly bullish as he affirmed that US economy still needs record-low interest rates for some more months as the country's economic recovery is expected to be slow. Nothing he is saying is truly a surprise, but investors react to the most recent events so look for USD to come under selling pressure. Also, US New home sales have plunged 11.2% in January to an annual rate of 309 K hitting a record low, against market expectations of an advance by about 3.8% to a 350K rate. EUR/USD is getting slapped lower as new home sales come in much lower than forecast, down 11.2%. The market expected a 360,000 annual rate but sales came in at a 309,000 annual rate.

I'm staying put while this current rally plays itself out. Currently it looks like we are in a triangular consolidation with the EUR/USD, and in most cases such consolidations give way to the major trend eventually. As I write this price action is retreating from a bounce off of major trendline on the hourly chart. With NFP out next week, we might just see a continuation of the prior two week's range with 1.3680/90 and 1.3460's as the bottom.

[Forexwatchman]

I've posted a graphic on my website regarding the above mentioned traiangular consolidation to help give readers a visual aid. Traditionally you will see this thing breakout in the direction of the main trend, but with recent economic developments, watch carefully over the next 24 hours. We might simply see this thing bounce off of support once it reaches 1.3467. My money is on price action not being able to break much below 1.3467 and if so it would almost certainly find support at the weekly S1.

[Forexwatchman]

There's been no shortage of major surprises this week from both the euro and the dollar as economic data continues to deify analysts expectations. Here's a quick summary of the news for today:

French February consumer confidence -33, way weaker than median forecast -28
Italy February business morale 84.0 (better than median forecast of 83.7), which is up from 83.2 in January and also highest read since June 2008
German Unemployment Change +7k vs median forecast +18K. Unemployment rate is steady at 8.2%
UK prelim Q4 2009 business investment -5.8%, -24.1% y/y

Confidence in the European economy is still very much on shaky ground as reflected in the euro zone February economic sentiment, an index of executive and consumer sentiment in the 16 nations using the euro. It slipped to 95.9 from a revised 96 in January (nothing ground shaking, but certainly not positive news either). Even with the uncertain times, sovereign interest from Russia, couple of Asian central banks and BIS were all rumored to be aggressive buyers during the European morning hours. This managed to get it over 1.3500, but not keep it there. Even though we see such tactics being employed here by the big boys, traders doubt the purchases will have much lasting impact. The best they can hope for seems to be a short-lived spike like Tuesday and Wednesday in which they turn around and sell the strength that they themselves created. It's a dog eat dog market out there, and your best bet is to wait for the ideal setups to occur and don't get "chopped-up" in the middle.

So now we are into the U.S. session and the fun continues. First up, a US Treasury official made the claim that US will do what it takes to retain AAA credit rating, a sign that the U.S. economy is still very much aware of its vulnerability in the markets. The U.S. Labor Dept. surprised us once again with the number of workers who filed initial claims for unemployment benefits, an unexpected 496,000. Analysts surveyed before the report had expected jobless claims to fall to 455,000 from 474,000 the week ended February 13, which was previously reported at 473,000. A Labor Department official said the unexpected large rise could partly reflect a backlog of claims that were unable to be processed in four Mid-Atlantic and New England states because of heavy snowfall. Sure, that's what it was...

So my analysis remains pretty much the same with a slightly bullish sentiment here for the euro, although the price action is going to most likely retest the weekly S1 that I mentioned would hold up as support yesterday and it did overnight last night. Then we might see a bit of a rebound back to our major trendline, but more likely to our blue MA. I'm waiting for one of those two things to occur before reentering the market. Good luck to you!

[Forexwatchman]

Originally Posted by Forexwatchman

Even though we see such tactics being employed here by the big boys, traders doubt the purchases will have much lasting impact. The best they can hope for seems to be a short-lived spike like Tuesday and Wednesday in which they turn around and sell the strength that they themselves created.

This is exactly what we have seen as price dropped from a high of 1.3538 down to 1.3466 in a little over an hour and then sharply reversed and rose back up to 1.3533. This is what makes your indicators collapse and your temper rise as a newbie trader, but hopefully I shed some light as to why it happens and hopefully even gave some forewarning in advance.

[Forexwatchman]

Standing at the crossroads

First let me give a quick recap to yesterday’s market action and then I will get into my analysis for the upcoming week. Some highlights from yesterday’s news:

· Bloomberg reports Germany may use KfW bank to buy Greek debt
· EU says Greece needs another EUR 4 bln in budget cuts
· Chicago PMI rises to 62.6 from 61.5; stronger than expected
· Reuters: Long dollar position on IMM* largest since Lehman collapse
· S&P 500 rises 0.1%
· Oil up 1.51 to $79.68; gold little changed at $1116
· AIG reports large loss, says may need more government aid
· US Q4 GDP revised to +5.9% from 5.7%, consumer spending weak
· University of Michigan consumer sentiment index falls to 73.6 from 74.4
· US existing home sales fall 7.2% in January
· S&P says US’s AAA rating “hanging in there”

EUR/USD traded with a cautious tone in early US trade, based mostly on continued EU pressuring on Greece for deeper deficit cuts and on risk aversion after AIG said it may need more US funds. Once US economic data was out of the way prices began to recover somewhat, with the market also reacting a Bloomberg story which outlines a potential German plan to buy Greek debt. That, combined with month-end euro demand and short-covering sent EUR/USD up from the 1.3560 area to a high of 1.3683 shortly before the European close. Central banks were sellers into strength today once again, just as they were buyers of weakness early in the session. Rumor has it that stops continue to build in the 1.3700 area.

EUR/USD has had a real hard time closing above our major trendline, doing it just one time on Feb 16, making yesterday’s break an important development. We closed above the line on February 16 at the 1.3780/90’s level before plunging to close the next day at 1.3600. this is a trade setup that I went over in my posts for that same week back when I was still very sure of my dovish stance on the pair. Although that wasn’t much of a signal then, this more recent one truly is a warning sign for the bears, as is the fact that EUR/USD penetrated the 61.8% retracement of the 1.2448/1.5146 rally, that I also went over in earlier posts, twice in the last six sessions but has yet to close below it. As it stands now I am slightly bullish, but it doesn’t take much to turn that around, and this week will certainly be the most crucial week of trading in three weeks.

So here’s where I stand as a trader going forward. Since January I have argued that the US Dollar was likely to recover against the Euro and other key counterparts on extremely one-sided bearish positioning and sentiment. Looking back I wish conditions were still so easy to read now as they were then, yet the tables are still clearly turned in the Dollar’s favor with the CFTC Commitment of Traders data showing Non-Commercials at a record net-long the US currency against the Euro. This week’s fundamentals will be the deciding factor on which way this currency pair decides to go, and I doubt the ranges we’ve been seeing will continue after this coming week.

On Monday US Personal Income and Spending data comes out at 8:300 as well as the later-morning ISM Manufacturing survey at 10:00 am. If we see large disappointments in either one of those numbers it could potentially set the tone for the rest of the week’s trade. Recently we’ve had poor Consumer Confidence numbers painting a dreary picture for the future of domestic consumption, but spending and income numbers are forecast to show reasonable gains through the first month of 2010. Consensus expectations likewise point to reasonable strength in ISM Manufacturing data. Bear in mind though that lofty expectations beget disappointments and we could see considerable volatility surrounding said event risk.

After that we look for Wednesday’s key ADP Employment Change survey data (8:15 am) as well as the ISM Services report (9:15 am). The former is expected to show that private companies shed 10,000 jobs from Payrolls through the month of February—the best such result since January of 2008. As we continue to see smaller job loss numbers in the ADP report and official Nonfarm Payrolls data, it leaves hope that we may continue to see improvements, but any sizeable declines could easily derail expectations for future recovery. The ISM Services Employment Index will certainly be looked upon to shed some light on the state of the jobs market and help foreshadow what we may expect for Friday’s NFP numbers. Said index remains below the expansion/contraction 50.0 mark at 44.0, and it will be critical to see whether conditions improved for the all-important US Services sector.

Finally, as most everyone is aware, the US Nonfarm Payrolls report promises a great deal of volatility not only in the US Dollar, but major financial markets are likely to see sharp price moves on any especially surprising results.

It seems that financial markets are at somewhat of a crossroads. One could certainly make the case that steady improvements in economic data suggest that the worst is now past. On the other, heady gains in the S&P 500 and other key financial market risk barometers leave the door wide open for pullbacks. The week ahead should provide ample clarification on several key themes for the S&P 500, which is very highly-correlated with the US Dollar. Good luck to you!!!

[Forexwatchman]

In yesterday's economic news we saw that the US ISM manufacturing index dropped to 56.5 in January from 58.4 in December. This slide disappoints market forecasts that the index would basically hold steady at 58.3. Personal Spending and Personal Income also came out and showed that despite the fact that income rose slightly in January, elevated unemployment and tight credit conditions is forcing income to weaken more so than usual. Consumer spending, which accounts for 2/3 of the growth in the U.S, rose slightly above expectations reaching in January 0.5% compared with the previous revised 0.3% and the expected 0.4% Sub indices in the income report showed that the saving rate of consumers dropped slightly in January reaching 3.3% from the previous reported estimate of 4.2%, while personal income excluding transportation costs declined to -0.2% compared with the previous 0.1% rise. Also disposable income dropped by -0.6% from 0.2%.

With a rise in consumer spending for the fourth consecutive month comes a sense of caution that economic conditions in the U.S might be pushed to their limits already, and we could see some pullback in the upcoming months as the rise came over expectations. Also Home Depot, Macy’s and other major retailers are forecasting a continuous rise in spending activities in the U.S over the upcoming months, so it remains to be seen if the U.S. can keep up with the current pace without as much economic stimulus from the government.

With the huge amount of liquidity that was pumped into the financial markets by the government, inflation remains weak in the U.S despite the rise in manufacturing activities, energy prices and global economic conditions and therefore investors will probably continue to feel optimistic in trading as it assures them that the Fed will not raise the benchmark interest rate at any time soon to control inflation. Therefore investors will turn their back in commodities especially Gold as it’s the perfect hedge against inflation but with no inflationary threats there is no need to invest in Gold, taking them most probably to target stocks along with risky investments.

EUR/USD has reached a new low 1.3437, but failed to close below the strong support line on the hourly chart at 1.3463. We had several great trade opportunities yesterday with a crossover of our MA's on the hourly as well as a classic 68.1 fibo level retracement that re-signaled last nights fall to new lows. Check out Forex-Nation for more.

With the market anticipating a rescue package for Greece to be unveiled tomorrow, we may continue to see ranging markets. Greece has a cabinet meeting on Wednesday where they will likely announce a fresh package of budget reforms. The next step after that would be for Greece to ask the EU for help and then the EU offering guarantees on Greek debt. My guess is that process unfolds before the week is out and Greece comes to market quickly to rollover some of its fast expiring debt. Greek interest rates are tumbling in anticipation of a bailout later this week, a supporting factor for the EUR/USD.

The market should get a short-term lift from the Greek news but it may soon go hunting for another target like Portugal or Spain, putting the EU to the test. Tomorrow has one significant news event to off with the release of the ADP Non-Farm Employment Change at 8:15 am so watch for that.