Over the past 24 hours, the currency market (and indeed most risk-attuned securities) has produced sharp reversals. This may seem like the beginnings of a range conditions; but for the vast majority of the liquid pairs, this is still just a retracement on a strong trend and therefore an attempt to pick tops and bottoms. However, after avoiding the momentum and volatile swings of the past two months, EURCHF may actually reflect this shift as a range opportunity.
[B]Why Would EURCHF Hold a Range?[/B]
[B][/B] · [B][U]Levels to Watch:[/U][/B] [B]-Range Top: 1.5225 (Trend, SMA, Fib)[/B] [B]-Range Bottom: 1.5015 (Fib, Pivot)[/B] · None of the major fundamental drivers that have swelled over the past month have been able to develop a trend in EURCHF. This pair’s stability is shocking considering the influence that broad risk trends have had on the dollar, yen and franc pairs. However, congestion won’t last forever. The SNB’s active intervention is a constant, bullish pressure. The more critical influence could be [the ECB rate decision](http://www.dailyfx.com/story/trading_reports/trading_news_reports/EUR_USD__Trading_the_European_Central_1244052805426.html) as it could define the bottom in policy. [B][/B] · Technicals are relatively thick on both sides of the market; but recent congestion may render these extremes impotent. In such extended periods of placid price action, otherwise heavy levels of resistance and support often fall to eventual breakouts. Nonetheless, we are watching the 200-day SMA, 50% Fib and trend confluence as 1.5225. [B][I]Suggested Strategy[/I][/B] [B][/B] · [B][U]Short[/U][/B][B]: Entry orders will be placed at 1.5195 as a test of the extreme resistance may not come.[/B] · [B][U]Stop[/U][/B][B]: An initial stop of 1.5260 covers the thicket of resistance should chop continue to rise. To secure profit, move the stop on the second lot to breakeven when the first target hits.[/B] · [B][U]Target[/U][/B][B]: The first objective equals risk (65) at 1.5130 and the second[/B][B] target will be 1.5055. [/B] [B]Trading Tip[/B] – Over the past 24 hours, the currency market (and indeed most risk-attuned securities) has produced sharp reversals. This may seem like the beginnings of a range conditions; but for the vast majority of the liquid pairs, this is still just a retracement on a strong trend and therefore an attempt to pick tops and bottoms. However, after avoiding the momentum and volatile swings of the past two months, EURCHF may actually reflect this shift as a range opportunity. The pair has held to a horizontal channel between 1.5225 and 1.5015 for the past seven weeks. In that time, a very mild bias has developed with a bullish lean; but resistance has been fortified since then. This pair finds a natural volatility damper through the tight economic links between the Euro Zone and Swiss economies. Add to that the SNB’s vocal efforts to intervene on the exchange rate and there is an offset for risk trends and economic changes. However, this congestion will not last forever. The most specific threat to a breakout looking out over the next week is [the ECB’s rate decision](http://www.dailyfx.com/story/bio1/Forex_Traders_to_See_High_1243626088878.html). A turn towards the hawkish side of the policy scale could catalyze an unfavorable break. For our strategy, the entry is set well within the range and its width allows for a reasonable stop. Considering the slow pace of price action recently, this position may take time to play out. Nonetheless, we will close all open orders by Friday’s close or should spot hit 1.5050 before entry is triggered.
[B]Event Risk for Euro Zone and Switzerland[/B]
[B]Euro Zone [/B]– The euro’s attachment to risk trends is difficult to gauge. However, the increased interest in sentiment has clearly placed the currency in the risk-hungry side of the market. This is supported by a number of factors; but is primarily rooted in the relatively high yield the ECB has been able to conserve and European officials cautious approach to policy during the crisis (which puts them ahead of the curve should global conditions confirm a genuine turn around or leave the region exposed should a second wave build). Disregarding the ebb and flow of general sentiment, event risk will hit its zenith tomorrow with the ECB’s rate decision. The group is heavily favored to pass on a change to the benchmark, but the forecasts on activity and alterations to quantitative easing efforts are still up in the air. German PM Merkel recently said central banks were overexposing themselves; but will Trichet see it the same way?
[B]Switzerland [/B]– Though it has fallen far from its high perch as one of the market’s key safe haven currencies, the Swiss franc still retains its link to risk when the swings in sentiment are large enough. Recently, it has been the case that risk appetite – and its subsequent reversal – has been momentous enough to keep the currency in line. Looking for markers to catalysts ahead, there are few, obvious drivers to spark a clear shift in risk appetite. On the other hand, there are a few native economic indicators to account for. Friday inflation figures and next Monday’s employment data will have a tempered impact on price action after the 1Q GDP release earlier.
[B]Data for June 4 – June 11[/B] [B][/B] [B]Data for June 4 – June 11[/B] [B]Date (GMT)[/B] [B]European Economic Data[/B] [B][/B] [B]Date (GMT)[/B] [B]Swiss Economic Data[/B] Jun 4 ECB Rate Decision [B][/B] Jun 5 CPI (MAY) Jun 8 EZ Sentix Investor Confidence (JUN) [B][/B] Jun 8 Unemployment Rate (MAY) Jun 8 German Factory Orders (APR) [B][/B] Jun 9 German Industrial Production (APR) [B][/B]
[I]Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John (firstname.lastname@example.org) [/I]