A sharp rally in the dollar and Japanese yen this morning has marked a sharp deterioration in risk appetite. We have been waiting for a clear trend to develop behind sentiment and the currency market for the past three months; and now we simply await the catalyst that will provoke such a broad shift.
How stable is a EURUSD Range?
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· [B][U]Levels to Watch:[/U][/B]
[B]-Range Top: 1.4375 (Trend, Range, Fib)[/B]
[B]-Range Bottom: 1.4150 (Trend, Fib, SMA)[/B]
· We have seen fundamental rumblings over the past 12-24 hours that risk appetite has been put on the lam. It is difficult to assign responsibility for this move to any single piece of event risk; but the catalyst is ultimately less important than the built up pressure behind the divergence between fundamentals and sentiment over the past weeks and months. To extend momentum to a breakout we will watch the [ECB decision and Friday’s NFPs](http://www.dailyfx.com/story/bio1/US_Dollar__Euro__Commodity_Dollars_1251489277216.html).
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· Like most other dollar-based or sentiment-controlled currency pair, EURUSD has developed a general congestion pattern since June. However, for this particularly liquid pair, there has been a gradual bullish bias behind to unsettled horizontal technical levels. As such, we are following the rising trend at 1.4150 along with Fib confluence and a 50 SMA.
[B][I]Suggested Strategy[/I][/B]
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· [B][U]Long[/U][/B][B]: Considering the high level of volatility today, we will set an aggressive entry at 1.4165. [/B]
· [B][U]Stop[/U][/B][B]: Though volatility is high, we will maintain a relatively tight stop at 1.4115. 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 is one-and-a-half times risk (75) at 1.4240. The second[/B][B] is 1.4320. [/B]
[B]Trading Tip[/B] – A [sharp rally in the dollar and Japanese yen this morning](http://www.dailyfx.com/story/bio2/Dollar_Up_Slightly___Breakout_1251818059549.html) has marked a sharp deterioration in risk appetite. We have been waiting for a clear trend to develop behind sentiment and the currency market for the past three months; and now we simply await the catalyst that will provoke such a broad shift. While it is clearly dangerous, our range setup for today is developed around the idea that today’s sharp move was in fact not the critical shift that we have been waiting for. Rather, this was a release of high volatility in such a way that it would have little impact on long-term trends (or congestion). For EURUSD, that means the sharp 200-piont drop this morning has already exhausted itself and has done so within a broader trend channel. Taking up with the bias in the trend channel, our setup looks to take advantage of the over-extended move through the short-term with an aggressive entry, nearby-stop and risk reward profile that compensates for the possibility of a breakout. Yet, the probability of a break is there; and therefore we need to stress test this strategy. First and foremost, the previous setup was for a long EURCHF position. We do not want to double up on exposure. What’s more, there is significant event risk from both the euro and dollar side later this week. Therefore, we will cancel open orders before Thursday’s ECB decision.
Event Risk for the Euro Zone and US
Euro Zone – Investor sentiment isn’t a clear cut price driver for the euro. A yield advantage and relatively strong economic outlook (according to policy makers) sets it in the riskier end of the spectrum. However, reservations have been held by the market and the offsetting consensus has put it right in the middle of pack. On the other hand, we have plenty of scheduled event risk in the days ahead to set of volatility. The economic flow has already begun with this morning’s better-than expected German employment data. Tomorrow, we will follow up with the second measure of Euro Zone 2Q GDP. The component data is the takeaway here as a guide to activity in the second half. The ECB rate decision on Thursday is top event risk; but the central bank is not expected to change rates. Instead, commentary can give insight into timing while the following days European Commission forecasts will set growth speculation.
US – With sentiment starting to stumble, we have seen the dollar turn into one of the immediate benefactors. This connection to risk appetite means that the long awaited breakout for the world’s most liquid currency may come from out of the blue as optimism often rises and falls without the helm of a specific indicator. However, should these intangible winds die down; we will still be left with plenty of fuel for a traditionally defined, event-driven breakout. There are a few notable pieces of event risk on the economic docket this week (like the FOMC minutes and ISM services sector survey); but the real threat to volatility is the Friday’s NFPs. The market-moving influence of this report has not been absolutely consistent recently; but we should not discount its potential impact. With the trend clearly set in a steady improvement, a smaller than expected net loss (or an actual gain) would likely find the best follow through.
[B]Data for September 2 – September 9 [/B]
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[B]Data for September 2 – September 9[/B]
[B]Date (GMT)[/B]
[B]European Economic Data[/B]
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[B]Date (GMT)[/B]
[B]US Economic Data[/B]
Sep 2
EZ GDP (2Q P)
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Sep 2
FOMC Meeting Minutes
Sep 3
ECB Rate Decision
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Sep 3
ISM Services (AUG)
Sep 4
European Commission Eco Forecast
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Sep 4
Change in Non-Farm Payrolls (AUG)
Sep 8
German Industrial Production (JUL)
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Sep 9
Fed’s Beige Book
Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John at <[email protected]>