Euro to Move Lower on Potential Easing?

Forex Trade Idea: 2014-05-13

Draghi made some interesting comments last week that sent the euro tumbling. Is this just the beginning for a big move lower for forex traders?

Before you move on, for those who are not familiar with my framework, signals, setups, or acronyms, please visit my discretionary trading framework blog.

EUR/USD 4 Hour Chart

EUR/USD 4 Hour Chart

I wanted to stay patient with recent events because experience has taught me that ECB monetary policy meetings are extremely unpredictable in both what is said and how the market reacts.  After letting the market vote in what they thought of Draghi’s comment (that the governing council is comfortable with acting at the next meeting), it looks like the majority is anticipating a policy move to ease in June.  And when you combine the fact that the Fed is reducing bond purchasing in the U.S., fundamentally, the Greenback is looking more attractive to me against the euro at the moment.

So what’s up with the ECB? will they or won’t they? No one will know until we get to that point (probably not even the ECB themselves), but for now, I like the monetary policy divergence and the fact that the market is starting to break below a rising trendline and the consolidation we’ve seen this year between 1.3750 – 1.3900.

And since monetary policy moves are game changers, for me this is a risk worth taking as the move can be significant to the down side if the ECB does ease in some way.  And if they don’t, the bounce higher can be significant because of positive risk sentiment and recent improvement in some European economic metrics, so my stop will be at the top of the recent consolidation to get me out at a small loss.  Here’s what I am doing:

Short half position EUR/USD at market (1.3755), stop at 1.3905, initial target at 1.3505

Remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly. Create your own ideas and don’t follow what I do. Risk Disclosure.

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 1.66:1. But it the market goes my way and the ECB eases, then I’ll definitely looking into trailing my stop and scaling into a larger position to maximize my potential reward.

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!