A Pullback In Volatility Exposes New Euro And Pound Trends
After Monday's dramatic price action, today's euro and pound price action seems placid. However, even with volatility cooling, it is hard to miss the recent breakouts and trend extensions that resulted from the market turmoil. See how our DailyFX Analysts are positioning after the market shift and what they expect from these two currencies through the near-term:
Chief Strategist - Antonio Sousa
My picks: Remain Short EUR/USD
Expertise: Fundamentals and Sentiment
Average Time Frame of Trades: 1 week - 3 months
European banks have written off $229 billion out of a global total of $588 billion in losses related the collapse of the U.S. subprime market and a selfish lack of cooperation between European politicians to solve the credit crisis is threatening the foundations of the European Union. As a result of that I have been short EUR/USD since 1.47 and I expect the euro to fall further as international investors increase their demand for almost risk free U.S. treasuries.
EUR/USD Sentiment Analysis
The ratio of long to short positions in the EURUSD stands at 1.00 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 1.31 as 57% of open positions were long. Retail traders have been selling the EURUSD and short positions are up by 8.2% since last week.
Currency Strategist - John Kicklighter
My picks: Short EURGBP
Expertise: Combining Money Management with Fundamental and Technical Analysis
Average Time Frame of Trades: 3 days - 1 week
The euro and pound-based pairs have experienced sharp declines in some of their most liquid arenas over the past week. The most visible declines came through the majors (EURUSD and GBPUSD). Now, with market sentiment settling (at least for now), we are getting retracements and congestion. However, this calm certainly shouldn't encourage passivity. Breakouts are highly probable with volatility still so high. On the other hand, after such aggressive extension, retracements could easily lead to major drawdowns for those looking to stick with the higher trend. A good alternative to this risk is holding a short EURGBP position.
Technicals suggest that a new trend is developing for this pair. After three consecutive declines through Monday's session, the market cleared a modestly-sloped rising trendline beginning with the March 17 low. With five confirmed test to establish its importance, the level was finally pushed along with a 200-day SMA at 0.7815. Today, a rebound from lows has brought spot back up to this former support level and so far held it. Fundamentally, expected interest rate cuts are heavily skewed in the pound's favor, but that has already been priced in. Major event risk is in the BoE rate decision which is expected to result in a quarter point rate cut. Should there be no move, a EURGBP drop would almost certainly result, but a more aggressive easing (like the RBA did in today's Asian session) could weigh the pair down.
Currency Strategist - Terri Belkas
My picks: Long EUR/GBP
Expertise: Fundamentals Combined With Technicals
Average Time Frame of Trades: 1 - 3 Days
EUR/GBP is one of those pairs that has a tendency to range-trade, and with the pair bouncing from support at the 61.8% fib of 0.7391-0.8189 at 0.7700, I think price is likely to continue higher. This is a trade I would consider holding for a few days and through the biggest piece of event risk for the British pound this week on Thursday, when the Bank of England is expected to cut rates by at least 25bps. There is some resistance at 0.7850, but I think the 38.2% fib of 0.8189-0.7701 at 0.7887 may serve as a better target.
Currency Analyst - David Rodriguez
My picks: Take partial profits on EUR/USD Short
Expertise: System Trading
Average Time Frame of Trades: 2-10 weeks
Exactly seven days ago I sold the Euro/US Dollar pair based on our forex trading signals systems, and the trade has panned out quite well. That said, I think we're likely to see a retracement in recent US dollar strength; this overwhelming move has actuall left our traders net-short the EURUSD and signals that we may see a continued near-term reversal. Take partial profits on the standing EUR/USD short, and move stops to previous support at the 1.3900 mark on the remainder.
Currency Analyst - Ilya Spivak
My picks: Pending EURUSD Short
Expertise: Macro Fundamentals, Classic Technical Analysis
Average Time Frame of Trades: 1 week - 6 months
The EURUSD has fallen sharply this week as traders cash in their investments for US dollars and using them to buy US Treasury Bonds as a safe-haven asset. Today, risk appetite improved as the markets cheered on a move by the Reserve Bank of Australia to cut interest rates 100 basis points: Australia's benchmark S&P/ASX 200 index added about 2% and US equity indices rose an average of 1.3% while Treasuries and the Japanese Yen declined. The door is now open to speculation of coordinated monetary easing from the world's top central banks in the days ahead. Should this happen, it is likely that traders will see a reversal of recent dollar strength as risk aversion reverses course. Look for a corrective rally to the downward sloping trend line connecting the wick highs from 07/15 (tentatively near 1.44) to enter short for as a return to focus on economic fundamentals brings the next leg of the bearish EURUSD trend.
Currency Analyst - John Rivera
My picks: Long EURUSD
Expertise: Fundamentals Combined With Technicals
Average Time Frame of Trades: 1-2 Days
Although, I am bearish the Euro in the longer-term, we could see a retrace over the next couple of days. Expectations continue to increase that the Fed will cut rates ahead of their October 29 meeting, by as much as 50bps. Market participants have been calling for a coordinated reduction by the major central banks. Although, I feel that the ECB will eventually reduce rates, it may not come before their next meeting which could give the Euro support. Target 1.38500.
Currency Analyst - David Song
My picks: Short EUR/JPY
Expertise: Fundamentals Combined with Technicals
Average Time Frame of Trades: 2 - 10 Days
Fading risk sentiment has clearly increased the appeal of the low-yielding Japanese yen, and may continue to strengthen against the euro over the following weeks as investors continue to limit their temperament for risk. After falling 700+ points to touch an intraday low of 135.04 yesterday, the pair has moved slightly higher to recover some of its losses, but continues to hold below 140.00. The failure to break above its current level suggests that the underlying downward trend should lead the pair lower over the course of the week, and we may see the pair fall through to test the 8/22/05 low of 133.51 for support on its way to the downside.
DailyFX
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