Before you move on, for those who are not familiar with my framework, signals, setups, or acronyms, please visit my discretionary trading framework blog.
I’ve got a long-term bearish bias on EUR/USD on the difference of outlook between each country’s monetary policies. First, we saw the ECB cut rates down to 0.25% in November, with Draghi recently reiterating that rates will remain low “for an extended period of time” and that they still have tools to act if conditions warranted more supportive action for the European economy. While 2013 seems like the year that Europe’s troubles bottomed out, economic conditions are still weak.
On the other side of the pond in the U.S., the Federal Reserve initiated a reduction of the quantitative easing program back in December. The $10B reduction in bond purchases is very small, but it’s most likely only the first step in the direction of removing support for what seems to be an improving U.S. economy. This is should be bullish for the Greenback for now.
So, on the four hour chart of EUR/USD above, we can see that the pair seems to have topped out in mid-December around 1.3800; this area was also a strong resistance area mid-October. The second set of retests/reversal came after the Fed Taper announcement, and it’s been bullish for USD since. I think this may be the start of a new trend lower, and after the bounce higher from Friday’s weak NFP number (which some argue may be an outlying number thanks to the weather).
Right now, the pair is consolidating around the mid-December consolidation area (1.3650 – 1.3700), so I will look to short on a move back lower. My initial target is the November lows, with a stop above the next major handle above. Here’s what I am going to do:
I’m only risking 0.50% of my account on this one, and with this trade structure, I have a potential reward-to-risk ratio of about 1.76:1 with my initial target–more if I scale in as the trade goes my way! Of course, anything can happen in the forex markets, so if the story changes I’ll be sure to reassess and adjust quickly if necessary. Stay tuned by following me on Twitter and Facebook!