A Focus On Euro And Pound Sees Stable Trends And Potential Breakouts
Fear-driven markets have found some reprieve in a global effort to curb a crippling financial crisis. For the currency market, the change has lead to a clear pull back in the safe haven US dollar and the anti-risk Japanese yen. More subtle however is the speculation over which economy has best dealt with the problem domestically and will lead their respective economy out of a recession first. Two key players in this reversal are the Euro Zone and UK. Will these European leaders lead the rebound; and what does it mean for their currencies? Read on to see the DailyFX analysts' take on the debate:
Chief Strategist - Antonio Sousa
My picks: Short EUR/USD
Expertise: Fundamentals and Sentiment
Average Time Frame of Trades: 1 week - 3 months
I have been short EUR/USD since 1.47 and I expect the euro to fall further once investors start looking beyond the short term implications of the recent actions taken by policy leaders to inject liquidity in the European banking system. In fact, economy activity in the euro area has been close to recessionary levels and the ECB is expected to cut interest rates once inflationary pressures ease.
Sentiment Analysis
The ratio of long to short positions in the EURUSD stands at -1.01 as nearly 50% of traders are short, according to the FXCM SSI which measures the positioning of thousands of retail traders. Last week, the ratio was at 1.03 as 51% of open positions were long. Long positions are down by 12.6% since last week and retail traders have been selling the EURUSD.
Currency Strategist - John Kicklighter
My picks: Pending EURUSD Long
Expertise: Combining Money Management with Fundamental and Technical Analysis
Average Time Frame of Trades: 3 days - 1 week
My pick from yesterday was a pending GBPUSD position which seems as if it may trigger today. Typically, I don't leverage exposure in a currency; but a short-term pull back in the US dollar amid stabilizing markets seems a larger theme in the market and my pending EURUSD long position today would be another bigger play. Fundamentally, the currency markets are simply repositioning to account for a shift in risk that has built up over the past two weeks. With the markets starting to favor the efforts of global policy makers, the sharp moves over that period that reflected fears as to where the market's bigger risks were could be retraced. However, we shouldn't expect to much in reversals across the market. Fear was really a component over the past two weeks, but trends have been driven for nearly three months now, as a global recession threatens everyone equally; and market participants are forced to reevaluate the long-term value of currencies - especially the dollar who may emerge from its financial crisis and recession before its counterparts.
Technically, a rebound in EURUSD has a number of technical barriers to break through. An aggressive approach could look for a break above resistance read on the lower frequency charts around 1.3785. Perhaps a more cautious take on the trade would be to wait for a confirmed break above the 50% fib of the November 2005 to April 2008 advance at 1.3850. Even beyond these levels, we could recieve static in the former support trendline from the 2002 swing low. Stops on the former entry should be derived from short-term charts while the longer-term should be wide enough to encompass the recent swing low. The lower the retracements from the September to October swing low will be more likely to make profit in less time, but risk/reward is of fundamental importance.
Currency Strategist - Terri Belkas
My picks: Look for Opportunity to Buy EUR/USD
Expertise: Fundamentals Combined With Technicals
Average Time Frame of Trades: 1 - 3 Days
There is a good amount of resistance in the region around 1.3700 - 1.3750, where we have the October 2 and 3 lows and October 9 highs. However, given the improvement in investor sentiment, I think there's potential for the US dollar to pull back which should benefit EUR/USD. However, I'd like to see the dust settle a bit following the news of the US government's massive intervention efforts. I will be looking to buy EUR/USD on a consolidation near 1.3600 to target 1.3850/70.
Currency Analyst - David Rodriguez
My picks: Stay bearish the GBP/USD longer-term
Expertise: System Trading
Average Time Frame of Trades: 2-10 weeks
The Sterling has clearly recovered much of its recent declines through the past days of trade, but I think it's premature to say that the overall downtrend is over. That said, I think the money is going to be made on the longer-term GBPUSD downturn, and I will trade accordingly. I don't recommend taking a short position right now, but watch for a reversal near key resistance surrounding the 1.8000 mark. I will update traders in subsequent "Analyst Picks" reports.
Currency Analyst - Ilya Spivak
My picks: GBPUSD Short (Pending)
Expertise: Macro Fundamentals, Classic Technical Analysis
Average Time Frame of Trades: 1 week - 6 months
The British Pound has apparently found a near-term bottom, showing a Hammer with next-day bullish candle confirmation having tested the lower boundary of a downward-sloping channel that has guided price action in recent months. Like the Euro, we maintain that the long-run trend favors the greenback as priced-in yield expectations see it gain at least 75 basis points on the sterling in the next 12 months. We expect the current correction in US Dollar strength to see the pair move higher for another test of the channel’s top and look for opportunities to sell, targeting a test of the most recent low at 1.6771.
For a chart illustrating the above as well as complete analysis on the other major currency pairs, please see the Candlestick Weekly Report.
Currency Analyst - John Rivera
My picks: Long EURJPY
Expertise: Fundamentals Combined With Technicals
Average Time Frame of Trades: 2-4 Days
The recent actions by the global community to support troubled banks and lubricate sticky credit markets have spurred a return of risk appetite. The EURJPY has been a main beneficiary of these results and with the interest rate outlook for the ECB growing as Credit Suisse overnight index swaps have risen over 30bps since October 10. With the 20 Day-SMA still far off at 146.65 there is significant upside. My first target will be the Psychological level of 145.00.
Currency Analyst - David Song
My picks: Short EUR/USD
Expertise: Fundamentals Combined with Technicals
Average Time Frame of Trades: 2 Days - 2 Weeks
The pair has fallen considerable over the last 2 months, and as long as the pair continues to hold below 1.40, I will favor a bearish outlook for the euro. The 100 day SMA has clearly crossed below the 200 day SMA, and I anticipate the downward momentum to lead the pair lower in the near-term. Over the next few days, we may see the pair bounce higher but should hold within its current range, and I expect the pair to move back towards the 10/13 low of 1.3410 over the course of the week.
DailyFX
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