High Risk, High Reward EURUSD Channel

An immediate risk disclaimer, attempting to spot a range in any dollar-based pair is very speculative and risky. As such, this is a setup only for those that are comfortable taking the risk. That being said, our strategy for EURUSD still tries to line up the fundamentals, technicals, positioning and risk/reward in such a way that the potential is still attractive.

[B]How stable is the EURUSD Range?[/B]

         [B]•    [U]Levels to Watch:[/U]
         -Range Top:       1.4620 (Channel, Fib)
         -Range Bottom: 1.4175 (Fib, Channel, SMA)[/B]
         
         •    Looking at the [economic dockets](http://www.dailyfx.com/calendar/index.html?currentWeek=/events-calendar/2009/0906/&direction=forward&collector=allInFolderDateDesc&view=week&timezone=GMT&currencyFilter=JPY|GBP|CHF|AUD|CAD|NZD|&importanceFilter=|) behind the euro and dollar, there are few specific indicators that threaten a significant bout of volatility upon their release. Second tier releases like US retail sales and the German ZEW survey are notable; but just not comprehensive enough to produce the kind of fundamental shift we would need at the current extreme. The real driver for this pair (more accurately the dollar) will be risk appetite. 
         
         •    A short is fighting the current. [EURUSD has been held in an uptrend](http://www.dailyfx.com/story/bio2/Yen_Rise_Accelerates___87_10_1252678552727.html) for going on six months now and the past week has brought yet another burst of volatility in the rapid advance. However, the trend can be described as overextended on a short and medium-term time frame. As for support a long-term 61.8% fib and channel top create a tangible ceiling.
         [I]
         [B]Suggested Strategy[/B][/I][B]
         
         •    [U]Short[/U]: An entry of 1.4590 is just below the channel top to allow for a good risk/reward.
         •    [U]Stop[/U]: A stop of 1.4690 is set well enough above the channel top to allow for a reversal. To secure profit, move the stop on the second lot to breakeven when the first target hits.
         •    [U]Target[/U]: The first objective is greater initial risk (150) at 1.4440. The second target is 1.4320. [/B]
                          [B]Trading Tip[/B][B] – An immediate risk disclaimer, attempting to spot a range in any dollar-based pair is very speculative and risky. As such, this is a setup only for those that are comfortable taking the risk. That being said, our strategy for EURUSD still tries to line up the fundamentals, technicals, positioning and risk/reward in such a way that the potential is still attractive. Our strategy is looking to go long a currency that has been under severe pressure for going on six months now. Short-term momentum has drawn the dollar to its lowest level in over 10 months and taken out many notable technical barriers along the way. However, every trend eventually settles and retraces. Our range is a position on momentum rather than direction. A rising trend channel has defined the currency’s advance since the mild pullback in mid-June. As for the position, it is imperative to reduce position size as we are fighting the current and looking for a short-term reversal. Our entry is set very close to a long-term 61.8 percent Fib retracement and the channel top around 1.4600/25. The initial stop should be set wide enough at 1.4690 to allow for a not-so-clean-cut reversal and the first target covers most of the initial risk but is still within reach of what we would expect for a reversal. Timing is very important. If we don’t see a reversal on Monday or Tuesday, chop in this area will acclimate the market to these heights and allow for a further drive higher. We will cancel orders in this event. [/B]

[B]Event Risk for the Euro Zone and US[/B]

[B]Euro Zone[/B] – The euro has been a fundamentally stable currency for months now. Growth numbers have confirmed the region’s two largest economies have returned to positive growth, the policy authorities have been transparent in their turn to a neutral policy and there has been little discussion about any financial troubles lingering in the European markets. This has decoupled the currency from trends in risk appetite; but the link has not been fully broken. As the foil to the US dollar, the euro will indirectly feel the burden of sentiment that guides the highly-sensitive dollar. Another beneficial condition for holding a range is the light economic calendar. Among the indicators scheduled for release, few if any have a history of making a notable influence on price action. The second quarter Euro Zone employment report has a considerable lag. The regional trade report and inflation data are fundamentally noteworthy; but from a speculative perspective, the member data is fully accounted for. The German ZEW survey is one of the few with a timely and unpredictable essence; yet it has a spot past for encouraging volatility.

[B]US[/B] – For event risk, the US economic docket is relatively light – at least in comparison to what would be needed to move the benchmark currency from its extreme lows. Nonetheless, there are notable indicators on tap. The retail sales report figure for August will start things off Tuesday with a look at consumer spending for the ongoing measure of this vital component to GDP for the third quarter. Industrial production and housing starts for the same period will offer activity bearings on two other important sectors. As for the CPI release, it will be restrained for immediate impact. The real, fundamental driver for this battered currency will be risk appetite.